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PROFESSOR: So what I want
to do is continue
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talking about risk.
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00:00:29,370 --> 00:00:35,170
We've already talked about risk
quite a bit last time.
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And what I want to do partly
is sort of emphasize some
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00:00:42,910 --> 00:00:51,380
specific points and, I think,
partly go over some of the
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ideas that have to do
with a community
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sharing its own risk.
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So rather than risk through
formal insurance markets, talk
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about what happens if people
try to insure each other.
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And what that does is it creates
a nice context for
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thinking about institutions in
general and the fact that
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people live together, how that
might actually change their--
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I think it's the display
settings.
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I think we need to move to--
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SPEAKER 1: [INAUDIBLE].
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PROFESSOR: OK.
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So how the fact that people live
together in one place and
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have to deal with each other on
a long run basis, how that
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affects the ways in which they
can structure their economic
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00:01:44,410 --> 00:01:46,280
lives to help each other.
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So it gets into a question
which is beyond, I think,
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moving us beyond what we'd
usually be talking about,
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which is individual decision
making, towards a more
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00:01:57,380 --> 00:02:00,370
collective action kind
of perspective.
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00:02:00,370 --> 00:02:05,640
So we want to slowly move
towards not just what happens
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at the level of the individual,
by why doesn't the
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collectivity together generate
good outcomes?
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And this is a good in
to that question.
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00:02:18,150 --> 00:02:20,500
So we're going to talk.
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So I'll give you a set of
examples of collective action,
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and we'll start talking a bit
about the collective efforts
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to improve things.
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I'm not sure what's happening.
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But we'll figure this out.
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So the first, just to remind
you, we were talking about
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risk and, in particular, the
fact that poor people face
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extremely high levels of risk.
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00:02:56,170 --> 00:03:00,260
49
00:03:00,260 --> 00:03:04,320
I said that yesterday, and
today I'll show you some
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numbers on that just to
get us on to that.
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Just to summarize where we were
last time, what we talked
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about primarily were sort of
both that the poor face a lot
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of risk and that they do a lot
of things to mitigate risk,
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but those things are not
necessarily good for them.
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So the examples we talked about
or, for example, going
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to work when your income
goes down.
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But when you go to work when
your income goes down,
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typically that's when
everybody else's
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income also went down.
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So they also all go to work.
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That drives wages down
and makes everybody
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potentially worse off.
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And the second example--
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what's another example of a
costly thing you could do to
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mitigate risk?
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Yep.
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AUDIENCE: Farm separate pieces
of land that are far apart
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from each other.
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PROFESSOR: Right.
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Farm separate pieces of land far
apart so that they don't
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have the same risk profile.
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AUDIENCE: You could choose not
to take a crop that might be
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more successful because you're
worried that if you spend
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money to buy new seeds and
it doesn't turn to be as
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successful then you loose more
money than if you just used
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your seeds from the
previous crop.
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PROFESSOR: Any other?
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AUDIENCE: Choosing a bunch of
different jobs instead of
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specializing in one.
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PROFESSOR: Yep.
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Choosing a bunch of different
jobs rather than doing one.
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Why do you want to specialize?
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AUDIENCE: It allows
you to become more
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productive, more skilled.
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PROFESSOR: So you give up--
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sorry?
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00:04:42,150 --> 00:04:44,600
AUDIENCE: I was just going
to say efficiency.
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PROFESSOR: Efficiency,
exactly.
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You just get better at a job
if you do it more with more
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[INAUDIBLE].
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00:04:49,500 --> 00:04:50,480
Yeah.
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AUDIENCE: [INAUDIBLE].
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00:04:51,730 --> 00:04:54,890
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PROFESSOR: Yeah.
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AUDIENCE: [INAUDIBLE]
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Like, if you were doing 15
classes [INAUDIBLE].
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00:05:01,375 --> 00:05:03,283
PROFESSOR: 15 is
a high number.
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00:05:03,283 --> 00:05:06,942
[LAUGHTER]
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00:05:06,942 --> 00:05:07,340
PROFESSOR: OK.
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00:05:07,340 --> 00:05:10,040
So I think you can see
the logic of this.
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So the question is we already
talked a bit about kind of the
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market for insurance.
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What we didn't talk as much
about is why don't people help
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each other?
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One solution to this problem
is just helping each other.
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So the logic of helping each
other is very, very simple.
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00:05:53,780 --> 00:06:02,070
We each get maybe independent
shocks and so it's quite
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00:06:02,070 --> 00:06:08,340
likely that, you know, when
somebody else gets a shock, I
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00:06:08,340 --> 00:06:11,360
don't and vice versa.
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00:06:11,360 --> 00:06:14,700
So we can kind of
split the shock.
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00:06:14,700 --> 00:06:17,960
So if anything bad happens,
we don't bear all of it.
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00:06:17,960 --> 00:06:22,190
We can pass on a part of
it to somebody else.
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00:06:22,190 --> 00:06:25,410
That seems straightforward.
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00:06:25,410 --> 00:06:28,840
So why doesn't that solve
most problems?
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00:06:28,840 --> 00:06:31,030
That's sort of the question that
we're going to spend some
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time thinking about.
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00:06:31,780 --> 00:06:34,110
It's a very simple
idea, right?
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We don't need to go to
an insurance company.
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00:06:40,910 --> 00:06:42,990
We can just pool together
our own risk.
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00:06:42,990 --> 00:06:49,509
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00:06:49,509 --> 00:06:52,467
AUDIENCE: [INAUDIBLE]
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00:06:52,467 --> 00:06:54,932
like, the cost of living
[INAUDIBLE] cost?
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00:06:54,932 --> 00:06:57,643
Like, how many people are
you going to pool
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00:06:57,643 --> 00:06:58,876
together for that?
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00:06:58,876 --> 00:07:00,601
And sometimes people think that
they shouldn't have to
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00:07:00,601 --> 00:07:01,350
pay for someone else's--
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00:07:01,350 --> 00:07:05,330
PROFESSOR: How many people
should we pool together?
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00:07:05,330 --> 00:07:08,550
AUDIENCE: As many as possible.
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00:07:08,550 --> 00:07:10,020
PROFESSOR: Why as many
as possible?
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00:07:10,020 --> 00:07:12,370
AUDIENCE: Because then it's
more diversified.
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00:07:12,370 --> 00:07:12,840
PROFESSOR: Right.
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00:07:12,840 --> 00:07:16,040
So if we think that--
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00:07:16,040 --> 00:07:23,700
so you have the example, the
probability, here, let's say
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they have independent
probabilities.
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00:07:27,060 --> 00:07:31,270
Two people, they have a
probability of a quarter that
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00:07:31,270 --> 00:07:37,130
they both end up with
a bad shock, right?
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00:07:37,130 --> 00:07:42,930
What's that probability if
there were n people?
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00:07:42,930 --> 00:07:44,180
AUDIENCE: 1/n squared?
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00:07:44,180 --> 00:07:47,640
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00:07:47,640 --> 00:07:49,930
PROFESSOR: N squared.
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00:07:49,930 --> 00:07:51,980
Think about what were
the probability.
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00:07:51,980 --> 00:07:54,070
The probability is half that--
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00:07:54,070 --> 00:07:57,290
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00:07:57,290 --> 00:07:59,230
I think you meant the other.
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00:07:59,230 --> 00:08:01,570
You just inverted
the exponents.
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00:08:01,570 --> 00:08:04,500
It's 1 over 2 to the power n.
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00:08:04,500 --> 00:08:07,694
I think you're writing it in--
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00:08:07,694 --> 00:08:09,330
it's 1 over 2 to the power n.
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00:08:09,330 --> 00:08:14,770
So as n goes to infinity, the
number of people who get
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00:08:14,770 --> 00:08:16,820
shocks together is going to 0.
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00:08:16,820 --> 00:08:19,510
So that's sort of a
very simple idea.
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00:08:19,510 --> 00:08:22,000
So the question is why
doesn't it happen?
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And that's sort of what we're
going to spend our time
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00:08:24,850 --> 00:08:26,100
talking about.
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00:08:26,100 --> 00:08:30,080
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So it does happen.
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00:08:31,940 --> 00:08:33,795
The first answer is
it does happen.
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00:08:33,795 --> 00:08:37,372
So here's a nice,
nice example.
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And it says something about--
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00:08:40,730 --> 00:08:44,010
actually, it's an interesting
example.
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00:08:44,010 --> 00:08:56,590
So it turns out that the way
to work in Nigeria, I don't
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actually give you money.
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00:08:59,070 --> 00:09:01,990
I don't actually give you
money when something bad
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00:09:01,990 --> 00:09:03,530
happens to you.
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00:09:03,530 --> 00:09:04,780
What do I do?
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00:09:04,780 --> 00:09:10,382
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00:09:10,382 --> 00:09:18,910
I loan you money and in
particular if you're expected
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00:09:18,910 --> 00:09:22,880
to pay me back, I ask
for less payback.
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00:09:22,880 --> 00:09:26,300
If I'm expected to pay you back,
I pay you more than what
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00:09:26,300 --> 00:09:28,680
I was supposed to owe you.
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00:09:28,680 --> 00:09:33,490
So usually interest contracts
tend to be completely
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00:09:33,490 --> 00:09:34,040
inflexible.
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00:09:34,040 --> 00:09:48,390
You know, my mortgage
is quarter of 5.4%.
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00:09:48,390 --> 00:09:52,580
I pay 5.4% every year until
the market is paid.
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00:09:52,580 --> 00:09:56,130
That's not what credit looks
like in Nigeria.
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00:09:56,130 --> 00:10:00,320
In these villages you found that
the interest rate itself
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00:10:00,320 --> 00:10:01,850
is very flexible.
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00:10:01,850 --> 00:10:11,790
So I pay more than what I owed,
in some sense, when you
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00:10:11,790 --> 00:10:15,190
are doing badly and I pay less
than what I owed when you're
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00:10:15,190 --> 00:10:16,770
doing well.
185
00:10:16,770 --> 00:10:20,480
That's a way to provide
insurance, but it goes through
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00:10:20,480 --> 00:10:21,730
this cover of a loan.
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00:10:21,730 --> 00:10:24,035
188
00:10:24,035 --> 00:10:26,007
AUDIENCE: How do they determine
if someone has an
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00:10:26,007 --> 00:10:26,993
adverse [INAUDIBLE]?
190
00:10:26,993 --> 00:10:28,965
You know, like, through
word of mouth?
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00:10:28,965 --> 00:10:30,444
PROFESSOR: Perfectly
good question.
192
00:10:30,444 --> 00:10:30,937
We'll come back.
193
00:10:30,937 --> 00:10:32,540
Let's come back to that.
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00:10:32,540 --> 00:10:35,630
I want to spend a minute,
before we get to that
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00:10:35,630 --> 00:10:39,710
question, on a more basic
question, which is why do you
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00:10:39,710 --> 00:10:40,960
think they do this?
197
00:10:40,960 --> 00:10:50,964
198
00:10:50,964 --> 00:10:56,990
Why do you think that they go
through this loan mechanism?
199
00:10:56,990 --> 00:11:02,380
So then what they seem to be
doing is paying you more on
200
00:11:02,380 --> 00:11:07,790
your loan when you do badly and
paying you less on your
201
00:11:07,790 --> 00:11:11,830
loan when the payer
is doing badly.
202
00:11:11,830 --> 00:11:14,100
Why does that make any sense?
203
00:11:14,100 --> 00:11:19,402
What could be driving
that structure?
204
00:11:19,402 --> 00:11:19,884
Yep.
205
00:11:19,884 --> 00:11:23,740
AUDIENCE: Because they know
that later on when they'll
206
00:11:23,740 --> 00:11:25,546
probably be doing badly that
they'll get a break and that
207
00:11:25,546 --> 00:11:26,160
it'll help them out.
208
00:11:26,160 --> 00:11:28,500
PROFESSOR: But why don't they
just give them money?
209
00:11:28,500 --> 00:11:29,350
Why through the loan?
210
00:11:29,350 --> 00:11:34,110
The question here I'm asking is
why is it that I give you a
211
00:11:34,110 --> 00:11:37,270
discount on your loan
rather than just
212
00:11:37,270 --> 00:11:40,250
handing you some cash?
213
00:11:40,250 --> 00:11:42,040
What is that pointing to?
214
00:11:42,040 --> 00:11:47,030
215
00:11:47,030 --> 00:11:52,280
AUDIENCE: Desire to
not to feel like
216
00:11:52,280 --> 00:11:53,840
you're giving a handout.
217
00:11:53,840 --> 00:11:56,282
PROFESSOR: So one possibility
is that you it's sort of a
218
00:11:56,282 --> 00:11:57,310
cover, right?
219
00:11:57,310 --> 00:11:59,090
That's an interesting idea.
220
00:11:59,090 --> 00:12:03,300
It's a cover for I'm giving
you the money.
221
00:12:03,300 --> 00:12:11,400
But it's not so much that people
are not seeing that I'm
222
00:12:11,400 --> 00:12:12,940
handing you some cash.
223
00:12:12,940 --> 00:12:15,830
They're seeing that I'm actually
paying you some money
224
00:12:15,830 --> 00:12:16,780
back for a loan.
225
00:12:16,780 --> 00:12:18,770
So in that sense it's a cover.
226
00:12:18,770 --> 00:12:23,290
227
00:12:23,290 --> 00:12:25,580
Maybe everybody else also
knows that you are poor.
228
00:12:25,580 --> 00:12:29,730
It's not so clear that it's
so hard, you know.
229
00:12:29,730 --> 00:12:30,980
You had a comment?
230
00:12:30,980 --> 00:12:34,416
231
00:12:34,416 --> 00:12:37,155
AUDIENCE: They don't want them
to think that, become
232
00:12:37,155 --> 00:12:40,392
dependent on things like that
being free or, like, kind of
233
00:12:40,392 --> 00:12:43,380
expect that they're going to
get handouts all the time?
234
00:12:43,380 --> 00:12:45,014
PROFESSOR: Well, why would
that be any different?
235
00:12:45,014 --> 00:12:49,240
I could always say that I'm
doing badly, and you'll pay me
236
00:12:49,240 --> 00:12:50,900
more on the loan I gave you.
237
00:12:50,900 --> 00:12:52,490
Why would that be any
different to loan?
238
00:12:52,490 --> 00:12:59,820
239
00:12:59,820 --> 00:13:02,410
AUDIENCE: Maybe because it
creates some sort of
240
00:13:02,410 --> 00:13:04,880
dependence relationship between
the two people.
241
00:13:04,880 --> 00:13:07,350
So if you have to agree to it
beforehand, the other one can
242
00:13:07,350 --> 00:13:09,820
just say, well, [INAUDIBLE].
243
00:13:09,820 --> 00:13:12,784
PROFESSOR: I will come
back to that.
244
00:13:12,784 --> 00:13:13,278
Yeah.
245
00:13:13,278 --> 00:13:15,501
AUDIENCE: I was just going to
say that it sort of sets up a
246
00:13:15,501 --> 00:13:18,382
contractual agreement where when
I'm not doing well, you
247
00:13:18,382 --> 00:13:19,916
help me out and when
you're not doing
248
00:13:19,916 --> 00:13:20,194
well, I help you out.
249
00:13:20,194 --> 00:13:21,444
PROFESSOR: Right.
250
00:13:21,444 --> 00:13:24,900
251
00:13:24,900 --> 00:13:25,605
Yeah.
252
00:13:25,605 --> 00:13:27,459
AUDIENCE: You could also say
that if someone just gives you
253
00:13:27,459 --> 00:13:32,040
money that's kind of expected
to get some of the money,
254
00:13:32,040 --> 00:13:35,010
something non zero benefits, a
loan that you have to repay,
255
00:13:35,010 --> 00:13:38,227
there isn't really a guarantee
how much of a discount you're
256
00:13:38,227 --> 00:13:38,970
going to get.
257
00:13:38,970 --> 00:13:42,960
You can't really take that
into account as well.
258
00:13:42,960 --> 00:13:46,880
PROFESSOR: So what you're saying
is related to what
259
00:13:46,880 --> 00:13:53,970
they're saying, which is that
one thing about a loan is
260
00:13:53,970 --> 00:13:58,190
using the loan suggests that
this is making use of a
261
00:13:58,190 --> 00:14:01,630
preexisting financial
relationship, so an ongoing
262
00:14:01,630 --> 00:14:02,510
relationship.
263
00:14:02,510 --> 00:14:06,190
The difference between my giving
you money seems to be
264
00:14:06,190 --> 00:14:11,330
mostly that in a sense these are
people who already had a
265
00:14:11,330 --> 00:14:12,820
financial relationship.
266
00:14:12,820 --> 00:14:18,850
So it's the case that a lot of
these people, one owes the
267
00:14:18,850 --> 00:14:21,190
other one money already.
268
00:14:21,190 --> 00:14:24,650
And adjusting the terms of that
suggests that it's not so
269
00:14:24,650 --> 00:14:29,740
much-- so in other words, it's
not clear that what this isn't
270
00:14:29,740 --> 00:14:34,980
telling us is simply that the
people who have these
271
00:14:34,980 --> 00:14:38,770
transactions are already people
who've had a stock
272
00:14:38,770 --> 00:14:39,860
against each other.
273
00:14:39,860 --> 00:14:41,730
So it's not the case that--
274
00:14:41,730 --> 00:14:47,370
so it's, you know, you keep
count and say it's not clear.
275
00:14:47,370 --> 00:14:53,780
So instead of thinking of the
loan as being a separate
276
00:14:53,780 --> 00:14:56,750
financial product, one way
to think about it is
277
00:14:56,750 --> 00:14:59,300
that we keep accounts.
278
00:14:59,300 --> 00:15:01,730
And I've done you five favors.
279
00:15:01,730 --> 00:15:03,470
You've done me three favors.
280
00:15:03,470 --> 00:15:05,250
And the net is two favors.
281
00:15:05,250 --> 00:15:09,325
And the loan amount really
reflects our netting out of
282
00:15:09,325 --> 00:15:10,180
those favors.
283
00:15:10,180 --> 00:15:14,580
So in other words, what is nice
about a loan is it's a
284
00:15:14,580 --> 00:15:17,010
net I owe you or you owe me.
285
00:15:17,010 --> 00:15:20,370
It's a net accounting device
for keeping track of who's
286
00:15:20,370 --> 00:15:23,220
done who how many favors.
287
00:15:23,220 --> 00:15:26,850
So by thinking of it in long
terms, it creates a natural
288
00:15:26,850 --> 00:15:30,160
framework for thinking about
this as kind of a social
289
00:15:30,160 --> 00:15:32,990
accounting device.
290
00:15:32,990 --> 00:15:34,520
How do I keep track of--
291
00:15:34,520 --> 00:15:38,840
like, maybe people also say,
well, I did you seven favors
292
00:15:38,840 --> 00:15:41,810
and you've not done me one.
293
00:15:41,810 --> 00:15:46,310
I have heard people say things
like that, so the same
294
00:15:46,310 --> 00:15:47,170
psychology.
295
00:15:47,170 --> 00:15:49,580
It's a good way to keep track.
296
00:15:49,580 --> 00:15:52,290
Thinking of it in terms of a
loan makes it clear that what
297
00:15:52,290 --> 00:15:55,250
you're trying to do is keep
track of an ongoing
298
00:15:55,250 --> 00:15:55,930
relationship.
299
00:15:55,930 --> 00:15:57,540
It's a stock.
300
00:15:57,540 --> 00:15:59,150
I gave you 100.
301
00:15:59,150 --> 00:16:01,070
You paid me back 50.
302
00:16:01,070 --> 00:16:03,150
Then I give you 30.
303
00:16:03,150 --> 00:16:04,820
Then you give me 200.
304
00:16:04,820 --> 00:16:09,400
And when I add those up, every
stage, what I really care
305
00:16:09,400 --> 00:16:12,390
about is not how many times
what happened but the net
306
00:16:12,390 --> 00:16:14,100
amount you owe me.
307
00:16:14,100 --> 00:16:16,780
And that's a good way to account
for the relationship
308
00:16:16,780 --> 00:16:22,155
so we can keep track of am I
someone who owes you or are
309
00:16:22,155 --> 00:16:25,960
you someone who owes me by sort
of counting that amount.
310
00:16:25,960 --> 00:16:28,400
And that way we don't need to
keep track of all these other
311
00:16:28,400 --> 00:16:32,660
numbers, whether it was 20
ones and 15 another time.
312
00:16:32,660 --> 00:16:35,470
It's just one number which
kind of measures our
313
00:16:35,470 --> 00:16:37,120
collective obligation.
314
00:16:37,120 --> 00:16:46,920
And the reason that we would
like-- why would we like to
315
00:16:46,920 --> 00:16:48,645
keep track of the collective
obligation?
316
00:16:48,645 --> 00:16:54,710
317
00:16:54,710 --> 00:16:58,170
Why does it matter that we keep
track of the collective
318
00:16:58,170 --> 00:16:59,420
obligation?
319
00:16:59,420 --> 00:17:02,829
320
00:17:02,829 --> 00:17:05,234
AUDIENCE: I mean, it promises
them security, right?
321
00:17:05,234 --> 00:17:11,160
322
00:17:11,160 --> 00:17:12,634
PROFESSOR: Security for who?
323
00:17:12,634 --> 00:17:17,504
324
00:17:17,504 --> 00:17:19,939
AUDIENCE: I would say that in
the community because one
325
00:17:19,939 --> 00:17:23,348
person who was taking thousands
of dollars from
326
00:17:23,348 --> 00:17:27,244
someone else, I'd know that if
that person asks me for money,
327
00:17:27,244 --> 00:17:28,240
I wouldn't loan the person
[INAUDIBLE].
328
00:17:28,240 --> 00:17:33,450
PROFESSOR: So one advantage of
that might be that it kind of
329
00:17:33,450 --> 00:17:37,750
summarizes my status in
the collective system.
330
00:17:37,750 --> 00:17:45,840
So it may be that everybody
knows I owe you 50.
331
00:17:45,840 --> 00:17:50,050
And then nobody will want to
lend me much more because it
332
00:17:50,050 --> 00:17:53,280
looks like I'm just somebody who
takes money from everybody
333
00:17:53,280 --> 00:17:54,210
and never gives them.
334
00:17:54,210 --> 00:17:58,160
So it's a good way to keep
track of whether there's
335
00:17:58,160 --> 00:18:01,630
someone who sort of tried
to beat the system.
336
00:18:01,630 --> 00:18:07,502
But there's another even
simpler reason why.
337
00:18:07,502 --> 00:18:11,117
AUDIENCE: I guess [INAUDIBLE],
which is
338
00:18:11,117 --> 00:18:12,330
basically the same thing.
339
00:18:12,330 --> 00:18:12,810
PROFESSOR: Speak up.
340
00:18:12,810 --> 00:18:16,684
AUDIENCE: Just to be a way to
avoid moral hazard, which is
341
00:18:16,684 --> 00:18:18,090
essentially basically
the same thing.
342
00:18:18,090 --> 00:18:20,043
PROFESSOR: Why would they
avoid moral hazard?
343
00:18:20,043 --> 00:18:23,424
AUDIENCE: Because it's an
accountability system.
344
00:18:23,424 --> 00:18:26,910
So, like, everyone in the
community is kind of aware of
345
00:18:26,910 --> 00:18:29,882
it's a way of keeping track of
it on a smaller scale at a
346
00:18:29,882 --> 00:18:31,295
larger company.
347
00:18:31,295 --> 00:18:33,180
For example, like, in the
city couldn't do it.
348
00:18:33,180 --> 00:18:34,230
PROFESSOR: Right.
349
00:18:34,230 --> 00:18:36,530
That's basically
the same thing.
350
00:18:36,530 --> 00:18:39,010
But in some ways I think there's
an even simpler reason
351
00:18:39,010 --> 00:18:44,380
why you may want to keep track
of it, which is simply it may
352
00:18:44,380 --> 00:18:50,180
well be that I just knew
vis-a-vis someone else, he may
353
00:18:50,180 --> 00:18:55,580
want to know, how many times
has this guy taken from me?
354
00:18:55,580 --> 00:18:58,890
And I may want to just put a
limit to that because I know
355
00:18:58,890 --> 00:19:00,710
that at some level
I'm going to die
356
00:19:00,710 --> 00:19:03,840
in 20 years or something.
357
00:19:03,840 --> 00:19:08,750
And so I'm going to say, look,
you know, if it's reciprocity,
358
00:19:08,750 --> 00:19:13,150
so that the reason I'm giving
him is x, that he will pay me
359
00:19:13,150 --> 00:19:18,110
back eventually, then I want
to know whether it's
360
00:19:18,110 --> 00:19:22,440
reasonable to expect that I'll
get enough back from him.
361
00:19:22,440 --> 00:19:25,510
So if I think that basically the
reason why I'm giving him
362
00:19:25,510 --> 00:19:29,270
the money is because he will
eventually give me back the
363
00:19:29,270 --> 00:19:30,360
money when I need it.
364
00:19:30,360 --> 00:19:34,980
Well, if my future is 20 years
and I've given him $5 million
365
00:19:34,980 --> 00:19:38,150
dollars, I'm unlikely to
get that much back.
366
00:19:38,150 --> 00:19:42,050
So I want to know roughly where
I am in that transaction
367
00:19:42,050 --> 00:19:46,440
because that's the only way
that I can kind of make a
368
00:19:46,440 --> 00:19:49,165
rational decision about whether
it's worth continuing.
369
00:19:49,165 --> 00:19:52,990
370
00:19:52,990 --> 00:19:56,730
If my reason for being in the
relationship is that I also
371
00:19:56,730 --> 00:19:59,640
think that I'm going to get
some favors from him then
372
00:19:59,640 --> 00:20:05,570
knowing how much he already owes
me is a way to keep track
373
00:20:05,570 --> 00:20:09,980
of how much can I reasonably
expect to get back from him.
374
00:20:09,980 --> 00:20:13,680
If that number's already way
past anything then I don't
375
00:20:13,680 --> 00:20:18,060
need to give him extra favor
to get more back.
376
00:20:18,060 --> 00:20:22,350
At some level I'm just not going
to be able to collect.
377
00:20:22,350 --> 00:20:28,410
So if there's some kind
of a rational--
378
00:20:28,410 --> 00:20:32,110
so I might want to limit my
exposure to him because in
379
00:20:32,110 --> 00:20:34,720
some sense I know that it is
never going to pay off to
380
00:20:34,720 --> 00:20:37,330
invest so much in a
particular person.
381
00:20:37,330 --> 00:20:39,820
So it might be a useful
accounting device.
382
00:20:39,820 --> 00:20:44,770
So I think that Chris Udry,
who did this study, his
383
00:20:44,770 --> 00:20:46,400
interpretation very
much was this.
384
00:20:46,400 --> 00:20:52,290
They're keeping track of how
much they owe each other, that
385
00:20:52,290 --> 00:20:57,780
everybody knows roughly I owe
this guy this much, which is
386
00:20:57,780 --> 00:20:59,220
within reasonable limits.
387
00:20:59,220 --> 00:21:00,610
It's not too much.
388
00:21:00,610 --> 00:21:05,890
And, therefore, I can expect
to get it back eventually.
389
00:21:05,890 --> 00:21:13,990
So this is a table from
Chris's paper.
390
00:21:13,990 --> 00:21:18,440
And it's just a very simple
point, but it's worth looking
391
00:21:18,440 --> 00:21:19,410
at the paper.
392
00:21:19,410 --> 00:21:20,730
It's sort of striking.
393
00:21:20,730 --> 00:21:22,600
So it's the monthly
interest rate.
394
00:21:22,600 --> 00:21:24,160
These are huge numbers.
395
00:21:24,160 --> 00:21:26,360
That's why it's worth
looking at.
396
00:21:26,360 --> 00:21:31,450
The monthly interest rate,
when the borrower gets no
397
00:21:31,450 --> 00:21:39,990
shock, he pays four percentage
points less per month.
398
00:21:39,990 --> 00:21:42,780
That's a lot, right?
399
00:21:42,780 --> 00:21:43,870
Four percentage points.
400
00:21:43,870 --> 00:21:48,500
What's four percentage
per month compounded?
401
00:21:48,500 --> 00:21:54,060
402
00:21:54,060 --> 00:21:56,873
What's the compounded?
403
00:21:56,873 --> 00:21:59,760
AUDIENCE: [INAUDIBLE].
404
00:21:59,760 --> 00:22:01,550
PROFESSOR: Close to 50%.
405
00:22:01,550 --> 00:22:04,540
So that's like 50% off.
406
00:22:04,540 --> 00:22:08,570
So you're getting, like,
4% per month less.
407
00:22:08,570 --> 00:22:10,260
Now take a look at the number.
408
00:22:10,260 --> 00:22:17,590
When the lender, he has a bad
shock, no shock, he charges
409
00:22:17,590 --> 00:22:23,570
basically 10 percentage points
less per month than when he
410
00:22:23,570 --> 00:22:26,720
has a shock.
411
00:22:26,720 --> 00:22:32,200
Difference would be minus 7.5
and 2.6, is basically 10
412
00:22:32,200 --> 00:22:33,000
percentage points.
413
00:22:33,000 --> 00:22:35,420
But when he has a shock,
he charges 10
414
00:22:35,420 --> 00:22:36,700
percentage points more.
415
00:22:36,700 --> 00:22:38,350
So these are massive numbers.
416
00:22:38,350 --> 00:22:40,930
I mean, those are, like, huge.
417
00:22:40,930 --> 00:22:44,880
The interest rates just move
enormously suggesting that
418
00:22:44,880 --> 00:22:47,320
there is actually substantial
resource transfer
419
00:22:47,320 --> 00:22:48,570
that's going on.
420
00:22:48,570 --> 00:22:51,330
421
00:22:51,330 --> 00:22:52,720
Yeah.
422
00:22:52,720 --> 00:22:56,845
AUDIENCE: So is this like he
actually charges or the person
423
00:22:56,845 --> 00:22:58,165
just chooses to pay more?
424
00:22:58,165 --> 00:22:58,670
PROFESSOR: He chooses.
425
00:22:58,670 --> 00:23:01,560
So we don't know that.
426
00:23:01,560 --> 00:23:05,230
All we observe is that the
person pays that much more
427
00:23:05,230 --> 00:23:10,010
when the lender gets a shock.
428
00:23:10,010 --> 00:23:12,890
But the difference, just to get
the order of magnitude,
429
00:23:12,890 --> 00:23:14,510
these are very, very
large numbers.
430
00:23:14,510 --> 00:23:19,320
So these are substantial
transfers going on in both
431
00:23:19,320 --> 00:23:20,160
directions.
432
00:23:20,160 --> 00:23:25,870
On the other hand, there's
still 10% of a loan.
433
00:23:25,870 --> 00:23:28,120
So it's like, you know, the
stock is much bigger.
434
00:23:28,120 --> 00:23:29,640
So these people have an ongoing
435
00:23:29,640 --> 00:23:31,330
ledger with each other.
436
00:23:31,330 --> 00:23:40,220
And then they change that
number by changing the
437
00:23:40,220 --> 00:23:41,470
interest rate by a lot.
438
00:23:41,470 --> 00:23:45,350
439
00:23:45,350 --> 00:23:48,910
Now, what's that also
telling us?
440
00:23:48,910 --> 00:23:52,510
It's also telling us something
about the scope of this
441
00:23:52,510 --> 00:23:55,350
relationship, right?
442
00:23:55,350 --> 00:24:02,390
So if the way I'm going to get
my insurance is by getting
443
00:24:02,390 --> 00:24:04,760
even a 10 percentage
point reduction in
444
00:24:04,760 --> 00:24:07,820
the interest rate--
445
00:24:07,820 --> 00:24:09,610
so let's say the interest
rate is 15%.
446
00:24:09,610 --> 00:24:15,270
And I get 10 percentage points
off, but I owe you $100.
447
00:24:15,270 --> 00:24:16,520
How much do I save?
448
00:24:16,520 --> 00:24:30,640
449
00:24:30,640 --> 00:24:32,510
I save $5.00, right?
450
00:24:32,510 --> 00:24:38,280
I was going to pay you $15,
and I now pay $5.
451
00:24:38,280 --> 00:24:41,390
The main point is that the
amount of insurance that you
452
00:24:41,390 --> 00:24:45,190
can get through this system is
still very limited by the
453
00:24:45,190 --> 00:24:47,900
amount of loan there is because,
you know, if I'm
454
00:24:47,900 --> 00:24:50,910
giving you a discount on a loan
then that depends on the
455
00:24:50,910 --> 00:24:52,490
loan amount I had.
456
00:24:52,490 --> 00:24:55,010
So if the loan amount was $1
million then a discount on
457
00:24:55,010 --> 00:24:56,330
that is worth a lot.
458
00:24:56,330 --> 00:25:00,420
If these are poor people and
their net loan amount is $10
459
00:25:00,420 --> 00:25:03,090
then the fact that I'm getting
a discount from the loan is
460
00:25:03,090 --> 00:25:06,200
not giving me that
much insurance.
461
00:25:06,200 --> 00:25:10,050
So the downside of thinking
about it in loan terms and in
462
00:25:10,050 --> 00:25:16,100
principle, this could be
relatively small number.
463
00:25:16,100 --> 00:25:18,510
So I think these interest
rates are high.
464
00:25:18,510 --> 00:25:20,890
But they're not high enough to
turn a small number into a
465
00:25:20,890 --> 00:25:22,140
small number.
466
00:25:22,140 --> 00:25:25,710
467
00:25:25,710 --> 00:25:27,530
So that's sort of one thing
to keep in mind.
468
00:25:27,530 --> 00:25:30,190
We'll come back to this because
I want to talk a
469
00:25:30,190 --> 00:25:32,600
little bit more about other
forms of insurance.
470
00:25:32,600 --> 00:25:37,010
So one form of insurance we
observe is this loan.
471
00:25:37,010 --> 00:25:38,800
And that has its advantages,
and it's a
472
00:25:38,800 --> 00:25:40,290
nice accounting device.
473
00:25:40,290 --> 00:25:42,280
I can keep track of
what's going on.
474
00:25:42,280 --> 00:25:48,380
It has the disadvantage that if
I haven't given you a loan
475
00:25:48,380 --> 00:25:50,710
then I can't help you.
476
00:25:50,710 --> 00:25:52,430
It sort of goes through
this loan.
477
00:25:52,430 --> 00:25:57,910
So if you only owe me $5 then
it's not going to be a big
478
00:25:57,910 --> 00:26:00,320
transfer because you can,
at most, let off the
479
00:26:00,320 --> 00:26:02,580
interest on the $5.
480
00:26:02,580 --> 00:26:04,990
But the interest
on $5 is $0.50.
481
00:26:04,990 --> 00:26:06,840
And that's not going to make
a big difference to me.
482
00:26:06,840 --> 00:26:10,590
So in general that limits
the scope of the system.
483
00:26:10,590 --> 00:26:12,840
And what I want to talk about
is a bit of stuff from
484
00:26:12,840 --> 00:26:20,720
Thailand, which is different
because our colleague, Robert
485
00:26:20,720 --> 00:26:22,460
Townsend, has been studying
these villages
486
00:26:22,460 --> 00:26:23,980
for many, many years.
487
00:26:23,980 --> 00:26:28,640
And I'll show you some data
from what he's collected.
488
00:26:28,640 --> 00:26:32,860
And then we'll see that the way
insurance is offered in
489
00:26:32,860 --> 00:26:35,440
Thailand is very different
in principle.
490
00:26:35,440 --> 00:26:38,520
491
00:26:38,520 --> 00:26:40,280
And so institutional form--
492
00:26:40,280 --> 00:26:42,940
in Nigeria it's a loan.
493
00:26:42,940 --> 00:26:44,900
In Thailand we'll
see what it is.
494
00:26:44,900 --> 00:26:48,215
So first here's a nice table.
495
00:26:48,215 --> 00:26:51,970
It's sort of a fact that I've
been saying many times.
496
00:26:51,970 --> 00:26:55,100
It just says how much
risk do people bear?
497
00:26:55,100 --> 00:26:59,680
498
00:26:59,680 --> 00:27:03,940
So what this table is,
each row is a farmer.
499
00:27:03,940 --> 00:27:14,470
500
00:27:14,470 --> 00:27:16,450
They don't have data
for every farmer.
501
00:27:16,450 --> 00:27:19,120
But two things to note.
502
00:27:19,120 --> 00:27:21,520
One is look at the best
year and the worst
503
00:27:21,520 --> 00:27:22,770
year for these farmers.
504
00:27:22,770 --> 00:27:27,860
505
00:27:27,860 --> 00:27:31,600
They're somewhat correlated
but not perfectly, right?
506
00:27:31,600 --> 00:27:34,410
The best year for some
farmers was '85.
507
00:27:34,410 --> 00:27:37,580
The worst year for some
farmers was '85.
508
00:27:37,580 --> 00:27:41,550
The best year for some
farmers was '88.
509
00:27:41,550 --> 00:27:44,335
The worst year for some
farmers was '88.
510
00:27:44,335 --> 00:27:49,880
511
00:27:49,880 --> 00:27:51,185
Why am I emphasizing
the correlation?
512
00:27:51,185 --> 00:27:57,150
513
00:27:57,150 --> 00:27:59,860
These are all within the same
village, within one village.
514
00:27:59,860 --> 00:28:01,950
Why am I emphasizing
the correlation?
515
00:28:01,950 --> 00:28:03,910
AUDIENCE: To emphasize that the
shocks are independent.
516
00:28:03,910 --> 00:28:05,310
PROFESSOR: Yeah.
517
00:28:05,310 --> 00:28:08,950
So that there is scope
for insurance.
518
00:28:08,950 --> 00:28:12,870
I can insure you only if we
don't both get into trouble at
519
00:28:12,870 --> 00:28:15,140
the same time.
520
00:28:15,140 --> 00:28:18,770
So the worst year for one farmer
is not the worst year
521
00:28:18,770 --> 00:28:21,910
for the other farmer.
522
00:28:21,910 --> 00:28:23,500
The second thing is look
at the magnitudes.
523
00:28:23,500 --> 00:28:26,270
524
00:28:26,270 --> 00:28:31,350
That last column is
the percentage.
525
00:28:31,350 --> 00:28:35,440
If you look at the harvest
amounts, the best year and the
526
00:28:35,440 --> 00:28:37,105
worst year, the differences
are massive.
527
00:28:37,105 --> 00:28:43,720
528
00:28:43,720 --> 00:28:44,860
It's just the amounts.
529
00:28:44,860 --> 00:28:47,850
I just want you to
look the amounts.
530
00:28:47,850 --> 00:28:51,680
The amounts are impressive
because think about you got an
531
00:28:51,680 --> 00:28:58,120
income of 50 one year and
115 the next year.
532
00:28:58,120 --> 00:28:59,370
Those are big differences.
533
00:28:59,370 --> 00:29:25,020
534
00:29:25,020 --> 00:29:26,720
Anything else that
strikes you?
535
00:29:26,720 --> 00:29:46,920
536
00:29:46,920 --> 00:29:48,520
Now, this may be difficult
to see.
537
00:29:48,520 --> 00:29:51,090
But one thing that's interesting
is that if you
538
00:29:51,090 --> 00:29:52,380
look at the--
539
00:29:52,380 --> 00:29:59,040
it's not that the people who
have average less harvest, the
540
00:29:59,040 --> 00:30:00,960
risk seems to be independent
of that.
541
00:30:00,960 --> 00:30:04,570
So richer people seem to have
roughly the same risk as
542
00:30:04,570 --> 00:30:06,200
poorer people.
543
00:30:06,200 --> 00:30:08,720
So everybody seems to
be exposed to risk.
544
00:30:08,720 --> 00:30:11,390
It's not that the rich people
have less risk.
545
00:30:11,390 --> 00:30:14,570
AUDIENCE: How do you
define richness?
546
00:30:14,570 --> 00:30:18,400
PROFESSOR: Take the maximum
amount of harvest, the maximum
547
00:30:18,400 --> 00:30:22,320
harvest, the people with the
biggest maximum harvest
548
00:30:22,320 --> 00:30:23,110
[INAUDIBLE].
549
00:30:23,110 --> 00:30:24,810
This table is nice too.
550
00:30:24,810 --> 00:30:27,790
It goes back to answering
the implied question.
551
00:30:27,790 --> 00:30:28,580
What's going on?
552
00:30:28,580 --> 00:30:29,830
What's the source of risk?
553
00:30:29,830 --> 00:30:39,240
554
00:30:39,240 --> 00:30:40,630
AUDIENCE: These are all
the same households?
555
00:30:40,630 --> 00:30:40,820
PROFESSOR: Sorry?
556
00:30:40,820 --> 00:30:42,590
AUDIENCE: These are all
the same households?
557
00:30:42,590 --> 00:30:43,090
PROFESSOR: No.
558
00:30:43,090 --> 00:30:43,870
Yeah.
559
00:30:43,870 --> 00:30:46,360
These are the same households
as the previous table, same
560
00:30:46,360 --> 00:30:48,650
numbers, B35, 36.
561
00:30:48,650 --> 00:30:50,030
These are the same households.
562
00:30:50,030 --> 00:30:51,790
They all live in the
same village.
563
00:30:51,790 --> 00:30:54,720
And this is asking why
did you face risk?
564
00:30:54,720 --> 00:30:57,260
565
00:30:57,260 --> 00:31:02,170
And, again, mostly it has
to do with weather.
566
00:31:02,170 --> 00:31:08,030
Though, for some people, there's
one person who says
567
00:31:08,030 --> 00:31:11,960
that insects is the biggest
source of risk.
568
00:31:11,960 --> 00:31:46,730
569
00:31:46,730 --> 00:31:47,724
Yeah.
570
00:31:47,724 --> 00:31:50,209
AUDIENCE: I don't fully
understand how someone's best
571
00:31:50,209 --> 00:31:53,688
year was also someone's
worst year, how rain
572
00:31:53,688 --> 00:31:54,682
could be the problem--
573
00:31:54,682 --> 00:31:56,680
PROFESSOR: Yeah.
574
00:31:56,680 --> 00:31:58,990
Someone else want to
suggest the answer?
575
00:31:58,990 --> 00:32:06,325
576
00:32:06,325 --> 00:32:09,748
AUDIENCE: I mean, I think
it indicates that--
577
00:32:09,748 --> 00:32:11,085
I think there's two
potential answers.
578
00:32:11,085 --> 00:32:13,158
One, rain could be the answer.
579
00:32:13,158 --> 00:32:15,102
Maybe some of these fields
are irrigated.
580
00:32:15,102 --> 00:32:18,018
But judging by the variation on
even the wealthiest fields,
581
00:32:18,018 --> 00:32:20,448
which presumably would have
the greatest chance of
582
00:32:20,448 --> 00:32:22,878
irrigation, the fact that it's
still pretty big fluctuations,
583
00:32:22,878 --> 00:32:24,336
that's probably not
the answer.
584
00:32:24,336 --> 00:32:26,401
I mean, I think it's indicative
that there's other
585
00:32:26,401 --> 00:32:28,100
factors at work other
than rainfall.
586
00:32:28,100 --> 00:32:30,390
PROFESSOR: But they're saying
that it's rain.
587
00:32:30,390 --> 00:32:31,688
AUDIENCE: Sure.
588
00:32:31,688 --> 00:32:33,640
I mean, maybe because
they don't realize.
589
00:32:33,640 --> 00:32:36,365
I mean, I think if they realize
what the other farmer
590
00:32:36,365 --> 00:32:38,610
was doing that [INAUDIBLE]
591
00:32:38,610 --> 00:32:41,060
more successful, they'd
probably try to do it.
592
00:32:41,060 --> 00:32:44,000
So maybe they didn't realize
that fertilizer-- and maybe
593
00:32:44,000 --> 00:32:46,370
that they got unlucky and got
hit with a disease they
594
00:32:46,370 --> 00:32:46,830
weren't able to recognize.
595
00:32:46,830 --> 00:32:47,690
PROFESSOR: They didn't
realize.
596
00:32:47,690 --> 00:32:48,980
That could be.
597
00:32:48,980 --> 00:32:49,840
Go ahead.
598
00:32:49,840 --> 00:32:50,860
AUDIENCE: It could be
different crops.
599
00:32:50,860 --> 00:32:51,380
PROFESSOR: Yeah.
600
00:32:51,380 --> 00:32:55,990
So most of this explanation is
that some of them are doing
601
00:32:55,990 --> 00:32:56,960
very different crops.
602
00:32:56,960 --> 00:33:02,730
So it might be some crops
hate water and
603
00:33:02,730 --> 00:33:03,790
others really like it.
604
00:33:03,790 --> 00:33:07,710
Like, rice really
adores water.
605
00:33:07,710 --> 00:33:11,540
But cotton or chilies
hate water.
606
00:33:11,540 --> 00:33:16,450
So there are crops which you
get too much rain, you get
607
00:33:16,450 --> 00:33:23,510
lower output and crops which
output is always
608
00:33:23,510 --> 00:33:25,000
increasing in rain.
609
00:33:25,000 --> 00:33:27,970
And so one possible explanation
is that they were
610
00:33:27,970 --> 00:33:29,230
planting different crops.
611
00:33:29,230 --> 00:33:32,490
So we both planted
the same time.
612
00:33:32,490 --> 00:33:37,290
I'm planting a crop which will
hurt if the rain is bad and
613
00:33:37,290 --> 00:33:40,170
will do well when the rain is
good and the other way around.
614
00:33:40,170 --> 00:33:41,270
So that's one possibility.
615
00:33:41,270 --> 00:33:44,200
The other possibility is that
they're just micro climates,
616
00:33:44,200 --> 00:33:51,200
that the rain is sort of--
617
00:33:51,200 --> 00:33:57,310
after all, what matters is not
so much rain as such but rain
618
00:33:57,310 --> 00:33:58,530
at the right time.
619
00:33:58,530 --> 00:34:02,320
So I plant on a particular
day.
620
00:34:02,320 --> 00:34:04,800
My saplings have just come
out of the ground.
621
00:34:04,800 --> 00:34:09,320
That's when I need rain, when
the plant is young.
622
00:34:09,320 --> 00:34:14,260
And so it may well be that
the rain on those five
623
00:34:14,260 --> 00:34:16,030
days was very good.
624
00:34:16,030 --> 00:34:19,070
But then the guy who planted
later, he thought the rains
625
00:34:19,070 --> 00:34:20,719
would be better in five days.
626
00:34:20,719 --> 00:34:23,770
And then the rains were
really not better.
627
00:34:23,770 --> 00:34:24,920
They were really bad.
628
00:34:24,920 --> 00:34:27,969
So it may very well be that
there is either geographical
629
00:34:27,969 --> 00:34:31,969
variation in rainfall within a
local area or just over time.
630
00:34:31,969 --> 00:34:35,350
So I planted on a
particular day.
631
00:34:35,350 --> 00:34:37,860
I needed the rain 10 days
after that when the
632
00:34:37,860 --> 00:34:38,940
saplings came out.
633
00:34:38,940 --> 00:34:41,010
I got the rain.
634
00:34:41,010 --> 00:34:42,440
You didn't get the rain.
635
00:34:42,440 --> 00:34:45,110
So I think both of those
are plausible.
636
00:34:45,110 --> 00:34:47,840
So I just wanted you to
look at this because I
637
00:34:47,840 --> 00:34:48,840
keep talking of risk.
638
00:34:48,840 --> 00:34:51,340
But this is sort of a much
better way to look at it.
639
00:34:51,340 --> 00:34:54,429
You just see the magnitudes of
it and the sources of it.
640
00:34:54,429 --> 00:34:56,780
So I thought these tables
were very nice.
641
00:34:56,780 --> 00:35:01,950
And what he goes on to do in
this paper is asking how do
642
00:35:01,950 --> 00:35:03,200
people deal with risk?
643
00:35:03,200 --> 00:35:05,740
644
00:35:05,740 --> 00:35:14,350
And so he's describing three
villages very close to each
645
00:35:14,350 --> 00:35:17,690
other, to the point where one
of the villages, people
646
00:35:17,690 --> 00:35:20,580
actually use the financial
institutions
647
00:35:20,580 --> 00:35:21,580
in the other villages.
648
00:35:21,580 --> 00:35:23,650
So they're very close
to each other.
649
00:35:23,650 --> 00:35:25,480
They're exactly in this
area where the
650
00:35:25,480 --> 00:35:26,610
rainfall was measured.
651
00:35:26,610 --> 00:35:28,950
So the risk is roughly
what you saw.
652
00:35:28,950 --> 00:35:31,560
653
00:35:31,560 --> 00:35:34,670
So we got a sense of the risk.
654
00:35:34,670 --> 00:35:39,620
And in Nigeria we saw that
people respond by borrowing
655
00:35:39,620 --> 00:35:41,240
from each other.
656
00:35:41,240 --> 00:35:44,360
Here, in this particular
village, there are five
657
00:35:44,360 --> 00:35:47,430
different funds.
658
00:35:47,430 --> 00:35:49,330
So there's a village
savings fund.
659
00:35:49,330 --> 00:35:55,490
And the village savings fund
is actually an equity fund.
660
00:35:55,490 --> 00:35:59,220
These guys actually pay you
a different rate of return
661
00:35:59,220 --> 00:36:03,740
depending on what the borrowers
were willing to pay.
662
00:36:03,740 --> 00:36:09,110
So I put in money
into this fund.
663
00:36:09,110 --> 00:36:12,895
And then you come and borrow.
664
00:36:12,895 --> 00:36:17,750
665
00:36:17,750 --> 00:36:19,000
You're willing to pay 20%.
666
00:36:19,000 --> 00:36:21,510
667
00:36:21,510 --> 00:36:24,540
Then that money gets
rolled back to me.
668
00:36:24,540 --> 00:36:26,950
So it's a fund which has a
variable interest which
669
00:36:26,950 --> 00:36:28,780
depends on the village
demand levels.
670
00:36:28,780 --> 00:36:33,050
671
00:36:33,050 --> 00:36:45,730
What do you think should happen
to the interest rate in
672
00:36:45,730 --> 00:36:48,235
that fund when the rainfall
is good or bad?
673
00:36:48,235 --> 00:36:55,060
674
00:36:55,060 --> 00:36:58,000
How would it pay?
675
00:36:58,000 --> 00:36:59,465
Will it go up when the rainfall
is good or down?
676
00:36:59,465 --> 00:37:12,075
677
00:37:12,075 --> 00:37:14,257
AUDIENCE: Won't it go up because
people are willing pay
678
00:37:14,257 --> 00:37:15,500
more [INAUDIBLE]?
679
00:37:15,500 --> 00:37:21,370
PROFESSOR: So one possibility it
will go up because when the
680
00:37:21,370 --> 00:37:23,810
rainfall is good, productivity
is high.
681
00:37:23,810 --> 00:37:27,570
People are willing to buy
more inputs to produce.
682
00:37:27,570 --> 00:37:30,480
683
00:37:30,480 --> 00:37:32,295
Is that good for insurance
or bad for insurance?
684
00:37:32,295 --> 00:37:42,520
685
00:37:42,520 --> 00:37:43,508
Yeah?
686
00:37:43,508 --> 00:37:45,484
AUDIENCE: [INAUDIBLE]
687
00:37:45,484 --> 00:37:47,353
PROFESSOR: That's good for
insurance because the people
688
00:37:47,353 --> 00:37:48,310
who are getting high
689
00:37:48,310 --> 00:37:52,400
productivity shocks are borrowing.
690
00:37:52,400 --> 00:37:56,270
But you would imagine the
opposite, which is a fund with
691
00:37:56,270 --> 00:38:00,105
a variable interest rate where
we only borrow from it when
692
00:38:00,105 --> 00:38:01,355
we're desperate.
693
00:38:01,355 --> 00:38:03,030
694
00:38:03,030 --> 00:38:05,870
Then you might see the demand
for those funds being
695
00:38:05,870 --> 00:38:10,660
particularly high when rainfall
is bad because we're
696
00:38:10,660 --> 00:38:14,470
all trying to borrow from
that to survive.
697
00:38:14,470 --> 00:38:17,645
And at that point, very few
people are going to lend.
698
00:38:17,645 --> 00:38:19,610
The interest rate is
going to go up.
699
00:38:19,610 --> 00:38:21,430
That's going to be bad
for insurance.
700
00:38:21,430 --> 00:38:24,726
So it depends very much.
701
00:38:24,726 --> 00:38:29,800
Rather a fixed interest fund,
a variable interest fund can
702
00:38:29,800 --> 00:38:32,420
be either good or bad
for insurance.
703
00:38:32,420 --> 00:38:36,310
Then there is a fund for
purchase of pigs.
704
00:38:36,310 --> 00:38:38,440
Here, the interest
rate is fixed.
705
00:38:38,440 --> 00:38:40,560
But there's a rollover
provision.
706
00:38:40,560 --> 00:38:43,600
Rollover provision is if you are
in trouble and you can't
707
00:38:43,600 --> 00:38:47,690
pay, I can let you keep
the loan for longer.
708
00:38:47,690 --> 00:38:51,060
You pay more, but you don't
have to pay back now.
709
00:38:51,060 --> 00:38:52,440
Is that good for insurance
or bad?
710
00:38:52,440 --> 00:38:58,610
711
00:38:58,610 --> 00:39:01,060
AUDIENCE: Well, it depends
on the person
712
00:39:01,060 --> 00:39:03,020
that they're insuring.
713
00:39:03,020 --> 00:39:04,980
If the person [INAUDIBLE]
714
00:39:04,980 --> 00:39:08,410
they can keep rolling it over
and eventually drop out.
715
00:39:08,410 --> 00:39:13,310
But it could be good if the
person is experiencing some
716
00:39:13,310 --> 00:39:16,290
transitory shock [INAUDIBLE].
717
00:39:16,290 --> 00:39:17,930
PROFESSOR: Assuming that the
person is going to pay it
718
00:39:17,930 --> 00:39:19,220
back, it's good for insurance.
719
00:39:19,220 --> 00:39:21,740
Rollovers are good
for insurance.
720
00:39:21,740 --> 00:39:24,290
There's a fund for purchase
of fertilizer.
721
00:39:24,290 --> 00:39:29,410
So each of these is almost
like a proper financial
722
00:39:29,410 --> 00:39:31,040
institution at the
village level.
723
00:39:31,040 --> 00:39:34,550
So in this village,
the leader has
724
00:39:34,550 --> 00:39:36,280
organized a bunch of funds.
725
00:39:36,280 --> 00:39:44,120
And you can save money to
buy pigs in this fund.
726
00:39:44,120 --> 00:39:47,780
And right now if I've saved
money and you want to buy
727
00:39:47,780 --> 00:39:51,300
pigs, you can borrow
from this fund.
728
00:39:51,300 --> 00:39:54,920
And, likewise, there's money
in a fund for buying
729
00:39:54,920 --> 00:40:02,890
fertilizer, a rice bank where
the rice I grow I can store.
730
00:40:02,890 --> 00:40:05,640
And when I need rice, I
can take rice from it.
731
00:40:05,640 --> 00:40:08,150
And there's a health care fund
where we each put in money.
732
00:40:08,150 --> 00:40:11,660
And if somebody gets sick,
he gets to spend it.
733
00:40:11,660 --> 00:40:14,700
So this is a village which
is rich with financial
734
00:40:14,700 --> 00:40:15,560
institutions.
735
00:40:15,560 --> 00:40:16,810
These are not loans.
736
00:40:16,810 --> 00:40:26,000
In particular, the health care
fund or the rollover is
737
00:40:26,000 --> 00:40:32,250
something where I'm making a
direct transfer to the people
738
00:40:32,250 --> 00:40:34,250
who are hurting.
739
00:40:34,250 --> 00:40:37,860
740
00:40:37,860 --> 00:40:40,160
But it's not bilateral loans.
741
00:40:40,160 --> 00:40:45,050
These are kind of financing from
a financial institution.
742
00:40:45,050 --> 00:40:49,210
So the main point I'm making
here is that here you see a
743
00:40:49,210 --> 00:40:51,820
very different sort
of insurance.
744
00:40:51,820 --> 00:40:55,260
This is organized through
collective action.
745
00:40:55,260 --> 00:40:59,710
Everybody's getting together and
lending to everybody else.
746
00:40:59,710 --> 00:41:04,550
747
00:41:04,550 --> 00:41:09,415
Now, he goes down a few more
miles from May Wak to a
748
00:41:09,415 --> 00:41:11,580
village called Sop Wak.
749
00:41:11,580 --> 00:41:13,150
And what does he see?
750
00:41:13,150 --> 00:41:14,730
Well, on paper it looks
very similar.
751
00:41:14,730 --> 00:41:19,480
752
00:41:19,480 --> 00:41:21,710
But here's the problem.
753
00:41:21,710 --> 00:41:24,300
All the loans are in default.
754
00:41:24,300 --> 00:41:27,580
Not all, but a lot of loans
are in default.
755
00:41:27,580 --> 00:41:30,385
756
00:41:30,385 --> 00:41:32,245
Is this good or bad
for insurance?
757
00:41:32,245 --> 00:41:40,680
758
00:41:40,680 --> 00:41:41,930
Anybody else?
759
00:41:41,930 --> 00:41:53,140
760
00:41:53,140 --> 00:41:55,080
Why is a default bad
for insurance?
761
00:41:55,080 --> 00:42:02,872
762
00:42:02,872 --> 00:42:04,657
AUDIENCE: Because then the
people who are putting in the
763
00:42:04,657 --> 00:42:06,300
money won't get any money.
764
00:42:06,300 --> 00:42:08,005
PROFESSOR: But maybe the person
who is defaulting is
765
00:42:08,005 --> 00:42:10,400
the one who needs to not pay.
766
00:42:10,400 --> 00:42:13,375
It's so clear that default
is bad for insurance.
767
00:42:13,375 --> 00:42:16,730
The problem is with this default
then nobody will put
768
00:42:16,730 --> 00:42:19,220
money into the bank.
769
00:42:19,220 --> 00:42:24,510
So default is, in a sense, a
form of insurance, right?
770
00:42:24,510 --> 00:42:28,190
I allow you to not pay
when you can't pay.
771
00:42:28,190 --> 00:42:32,480
But if there's a lot of default
and I think that's
772
00:42:32,480 --> 00:42:36,410
mollified then I may not put
money into the bank.
773
00:42:36,410 --> 00:42:39,210
So, again, it's not clear
which way it goes.
774
00:42:39,210 --> 00:42:42,320
But he interprets this as saying
that these places,
775
00:42:42,320 --> 00:42:44,650
these banks, nobody's putting
money into them.
776
00:42:44,650 --> 00:42:46,130
So these banks are
kind of defunct.
777
00:42:46,130 --> 00:42:46,962
Yeah.
778
00:42:46,962 --> 00:42:50,025
AUDIENCE: How could it default
and not repay?
779
00:42:50,025 --> 00:42:53,580
PROFESSOR: Oh, we could imagine
a world where that's
780
00:42:53,580 --> 00:42:55,400
exactly how we provide
insurance.
781
00:42:55,400 --> 00:43:04,040
So we each imagine
that the rule is.
782
00:43:04,040 --> 00:43:09,820
Year one, if you have a shock
this year, you borrow.
783
00:43:09,820 --> 00:43:15,370
Even year two, if you again have
a shock then you default.
784
00:43:15,370 --> 00:43:19,520
We write it off, happens in
one time out of 10 or
785
00:43:19,520 --> 00:43:20,950
one time out of 20.
786
00:43:20,950 --> 00:43:25,110
But, you know, it can
happen to any of us.
787
00:43:25,110 --> 00:43:28,370
And when it's really bad and
I've had two shocks in a row,
788
00:43:28,370 --> 00:43:32,412
it's better for me to not have
to pay back than you to give
789
00:43:32,412 --> 00:43:34,020
me yet another loan.
790
00:43:34,020 --> 00:43:36,210
There's no particular reason why
default would be bad for
791
00:43:36,210 --> 00:43:38,650
insurance if we could
make sure that
792
00:43:38,650 --> 00:43:39,900
the default is limited.
793
00:43:39,900 --> 00:43:42,860
794
00:43:42,860 --> 00:43:44,325
AUDIENCE: Doesn't the insurance
company just loose
795
00:43:44,325 --> 00:43:45,970
all that money though?
796
00:43:45,970 --> 00:43:46,280
PROFESSOR: Yeah.
797
00:43:46,280 --> 00:43:48,860
But it counts into its--
798
00:43:48,860 --> 00:43:51,220
the insurance company is
losing that money.
799
00:43:51,220 --> 00:43:53,030
But remember, when an insurance
company makes a
800
00:43:53,030 --> 00:43:56,260
payment, it also loses money.
801
00:43:56,260 --> 00:43:58,140
So just think of it as
a form of payment.
802
00:43:58,140 --> 00:44:01,620
Default could just be a form of
insurance because I could
803
00:44:01,620 --> 00:44:04,090
be paying people in the
form of default.
804
00:44:04,090 --> 00:44:05,040
You don't have to pay.
805
00:44:05,040 --> 00:44:06,260
Fine.
806
00:44:06,260 --> 00:44:07,620
You don't have any money,
you don't have to pay.
807
00:44:07,620 --> 00:44:11,350
That's a perfectly legitimate
form of insurance.
808
00:44:11,350 --> 00:44:16,336
Just the question is whether
it's deliberate, in which case
809
00:44:16,336 --> 00:44:17,720
there will be too much of it.
810
00:44:17,720 --> 00:44:20,240
And in that case the
system won't work.
811
00:44:20,240 --> 00:44:21,228
Yep.
812
00:44:21,228 --> 00:44:24,192
AUDIENCE: That may be the case
when there's an insurance
813
00:44:24,192 --> 00:44:27,156
company or a government which
is writing off the loan.
814
00:44:27,156 --> 00:44:30,614
But the latest census
[INAUDIBLE].
815
00:44:30,614 --> 00:44:35,570
816
00:44:35,570 --> 00:44:37,990
PROFESSOR: I guess a lot is
relative to what they're
817
00:44:37,990 --> 00:44:39,730
willing and what they
were planning for.
818
00:44:39,730 --> 00:44:42,470
There's nothing else about
a lot of default.
819
00:44:42,470 --> 00:44:43,740
It's just what you're
planning for.
820
00:44:43,740 --> 00:44:47,230
I could plan for, you know, one
loan out of five will be
821
00:44:47,230 --> 00:44:52,200
defaulted, and the others will
just absorb that loss.
822
00:44:52,200 --> 00:44:53,170
It might me fine.
823
00:44:53,170 --> 00:44:54,650
It may be a form of insurance.
824
00:44:54,650 --> 00:44:57,040
Default is a natural
form of insurance.
825
00:44:57,040 --> 00:44:58,920
That's a way of understanding.
826
00:44:58,920 --> 00:45:03,420
There is nothing obviously
bad about default if it's
827
00:45:03,420 --> 00:45:05,570
completely just I
have no choice.
828
00:45:05,570 --> 00:45:06,540
I default.
829
00:45:06,540 --> 00:45:10,030
That's a perfectly good way to
insure myself because then I
830
00:45:10,030 --> 00:45:12,680
don't need to pay when I'm
in really bad shape.
831
00:45:12,680 --> 00:45:16,620
It's when I start using as an
excuse to not pay that it
832
00:45:16,620 --> 00:45:17,888
makes a difference.
833
00:45:17,888 --> 00:45:18,386
Yeah.
834
00:45:18,386 --> 00:45:20,876
AUDIENCE: I think I'm getting
tripped up because usually
835
00:45:20,876 --> 00:45:24,860
default is when the intent is
for you to get that paid back.
836
00:45:24,860 --> 00:45:28,346
So if you're using default as
a form of insurance, to me,
837
00:45:28,346 --> 00:45:29,591
it's no longer default then.
838
00:45:29,591 --> 00:45:32,340
It's just a form of insurance.
839
00:45:32,340 --> 00:45:32,460
PROFESSOR: OK.
840
00:45:32,460 --> 00:45:34,210
I kind of agree with that.
841
00:45:34,210 --> 00:45:37,490
I mean, that seems like we're
arguing over words.
842
00:45:37,490 --> 00:45:41,240
So I think default just means
I don't pay the loan.
843
00:45:41,240 --> 00:45:43,340
And when I don't pay the
loan, that might
844
00:45:43,340 --> 00:45:46,080
very well be desirable.
845
00:45:46,080 --> 00:45:51,910
Now, as you see, their view is
a bit that it's not actually
846
00:45:51,910 --> 00:45:56,530
necessarily a good idea to
collect because they're taking
847
00:45:56,530 --> 00:46:00,250
the view that these people are
defaulting because they need
848
00:46:00,250 --> 00:46:01,170
to default.
849
00:46:01,170 --> 00:46:03,430
So it's not clear what
default means here.
850
00:46:03,430 --> 00:46:04,885
And that's worth
understanding.
851
00:46:04,885 --> 00:46:07,760
852
00:46:07,760 --> 00:46:10,580
Then he walks down to
a third village.
853
00:46:10,580 --> 00:46:13,290
The third village is
a few miles down.
854
00:46:13,290 --> 00:46:17,590
And none of these funds exist.
855
00:46:17,590 --> 00:46:20,600
So one village, all the funds
are working well.
856
00:46:20,600 --> 00:46:23,130
In the second village, there's
lot of default.
857
00:46:23,130 --> 00:46:24,490
The funds are still there.
858
00:46:24,490 --> 00:46:28,310
Third village, no funds
except one.
859
00:46:28,310 --> 00:46:30,850
And you are in the Nigerian
mode where you're just
860
00:46:30,850 --> 00:46:32,100
borrowing from each other.
861
00:46:32,100 --> 00:46:36,390
862
00:46:36,390 --> 00:46:38,150
So what's the advantage
of a fund over
863
00:46:38,150 --> 00:46:39,400
borrowing from each other?
864
00:46:39,400 --> 00:46:42,630
865
00:46:42,630 --> 00:46:47,180
Let me see if someone else
wants to answer.
866
00:46:47,180 --> 00:46:48,780
What's the advantage
of a fund over
867
00:46:48,780 --> 00:46:50,650
borrowing from each other?
868
00:46:50,650 --> 00:46:53,760
AUDIENCE: They have more
resources for you to borrow?
869
00:46:53,760 --> 00:46:54,624
PROFESSOR: Why?
870
00:46:54,624 --> 00:46:57,677
AUDIENCE: One individual has a
limited constraint, whereas if
871
00:46:57,677 --> 00:46:59,380
people pool their
money together.
872
00:46:59,380 --> 00:46:59,810
PROFESSOR: Right.
873
00:46:59,810 --> 00:47:01,830
It's a way to pool many
more people in.
874
00:47:01,830 --> 00:47:06,240
So that's the advantage
of a fund.
875
00:47:06,240 --> 00:47:08,730
So what do you think
is going on?
876
00:47:08,730 --> 00:47:11,690
Why do these villages, which
are very similar, have same
877
00:47:11,690 --> 00:47:15,880
kind of risk next to
each other, have
878
00:47:15,880 --> 00:47:17,130
very different patterns?
879
00:47:17,130 --> 00:47:22,770
880
00:47:22,770 --> 00:47:28,515
Think about what it takes for
such an institution to exist.
881
00:47:28,515 --> 00:47:38,076
882
00:47:38,076 --> 00:47:40,990
AUDIENCE: They need the trust
of the [INAUDIBLE].
883
00:47:40,990 --> 00:47:41,670
PROFESSOR: Right.
884
00:47:41,670 --> 00:47:50,950
So the way one of these funds
works is by saying that I'm
885
00:47:50,950 --> 00:47:54,260
going to put money into it now
because I can get money into
886
00:47:54,260 --> 00:47:55,510
it in the future.
887
00:47:55,510 --> 00:48:00,140
888
00:48:00,140 --> 00:48:01,390
What does that assume?
889
00:48:01,390 --> 00:48:04,946
890
00:48:04,946 --> 00:48:05,423
Yeah.
891
00:48:05,423 --> 00:48:06,360
AUDIENCE: It's going to
exist in the future.
892
00:48:06,360 --> 00:48:07,800
PROFESSOR: That there
is a future.
893
00:48:07,800 --> 00:48:11,930
So in other words, if I think
that everybody else is going
894
00:48:11,930 --> 00:48:17,200
to default today, I should
default as well because there
895
00:48:17,200 --> 00:48:18,780
will be no fund in the future.
896
00:48:18,780 --> 00:48:22,920
897
00:48:22,920 --> 00:48:33,740
So this is a classic kind of
problem of anything that's
898
00:48:33,740 --> 00:48:35,430
sort of sustained
by the future.
899
00:48:35,430 --> 00:48:37,760
It depends on there
being a future.
900
00:48:37,760 --> 00:48:46,460
So this is the problem that
right now a lot of microcredit
901
00:48:46,460 --> 00:48:48,580
organizations are facing.
902
00:48:48,580 --> 00:48:51,930
Microcredit organizations
promise you a loan if you pay
903
00:48:51,930 --> 00:48:53,180
back your loan.
904
00:48:53,180 --> 00:48:55,300
905
00:48:55,300 --> 00:49:04,040
Now, suppose you think that
nobody else will pay back
906
00:49:04,040 --> 00:49:05,630
their loan.
907
00:49:05,630 --> 00:49:07,365
What's going to happen to the
microcredit organization?
908
00:49:07,365 --> 00:49:14,130
909
00:49:14,130 --> 00:49:15,680
It's going to go bankrupt.
910
00:49:15,680 --> 00:49:18,380
If it goes bankrupt, what's
going to happen
911
00:49:18,380 --> 00:49:20,672
to your future loan?
912
00:49:20,672 --> 00:49:21,090
AUDIENCE: It doesn't exist.
913
00:49:21,090 --> 00:49:22,460
PROFESSOR: It doesn't exist.
914
00:49:22,460 --> 00:49:27,070
So basically if everybody
expects people to default in
915
00:49:27,070 --> 00:49:31,500
the future then I should
default now.
916
00:49:31,500 --> 00:49:37,110
So if everybody else is expected
to default, it is
917
00:49:37,110 --> 00:49:38,470
rational for me to default.
918
00:49:38,470 --> 00:49:41,440
919
00:49:41,440 --> 00:49:44,470
If everybody expected to pay
back in the future then it's
920
00:49:44,470 --> 00:49:49,170
rational for me to pay back
because then the fund will be
921
00:49:49,170 --> 00:49:51,020
there for a long time.
922
00:49:51,020 --> 00:49:54,250
So I think this is sort of
the reason why funds--
923
00:49:54,250 --> 00:49:58,760
so all of these kind of informal
institutions are
924
00:49:58,760 --> 00:50:03,135
fragile because they rely on
this kind of coordination.
925
00:50:03,135 --> 00:50:05,670
926
00:50:05,670 --> 00:50:09,800
I only want to repay if
everybody else wants to repay
927
00:50:09,800 --> 00:50:13,410
or at least as long as enough
people want to repay that the
928
00:50:13,410 --> 00:50:15,100
fund will be going.
929
00:50:15,100 --> 00:50:17,710
If I expect that lots of people
will default in the
930
00:50:17,710 --> 00:50:20,650
future, I should default now
because the fund is going to
931
00:50:20,650 --> 00:50:22,330
go out of business.
932
00:50:22,330 --> 00:50:24,610
I'm not going to get anything
out of it in the future.
933
00:50:24,610 --> 00:50:28,270
So I might as well just stop
having anything to do with it.
934
00:50:28,270 --> 00:50:30,960
So it totally depends
on trust.
935
00:50:30,960 --> 00:50:33,580
If I believe that everybody else
is going to behave well
936
00:50:33,580 --> 00:50:35,470
then I should behave well.
937
00:50:35,470 --> 00:50:39,880
If I think that everybody else
is going to behave badly then
938
00:50:39,880 --> 00:50:41,650
it's over in some sense.
939
00:50:41,650 --> 00:50:45,110
That's one central weakness
of these kinds of informal
940
00:50:45,110 --> 00:50:46,475
institutions.
941
00:50:46,475 --> 00:50:55,420
They rely on the expectation
that I'm going to behave well
942
00:50:55,420 --> 00:50:57,080
in the future.
943
00:50:57,080 --> 00:50:58,410
Yeah.
944
00:50:58,410 --> 00:51:01,710
AUDIENCE: Well, if everyone else
is going to pay back in
945
00:51:01,710 --> 00:51:03,742
the future, wouldn't it still
be better for you to default
946
00:51:03,742 --> 00:51:07,410
now if you were being selfish
because the fund's still going
947
00:51:07,410 --> 00:51:08,410
to exist whether or not--
948
00:51:08,410 --> 00:51:08,670
PROFESSOR: No.
949
00:51:08,670 --> 00:51:10,430
But then you can't
borrow again.
950
00:51:10,430 --> 00:51:13,280
Then they can say, look,
you defaulted.
951
00:51:13,280 --> 00:51:15,550
You didn't pay the money
when you needed to.
952
00:51:15,550 --> 00:51:17,390
You were supposed to pay
money into the fund.
953
00:51:17,390 --> 00:51:18,390
You didn't pay.
954
00:51:18,390 --> 00:51:20,270
Now you're out.
955
00:51:20,270 --> 00:51:24,620
But if you come and ask me to
put money into the fund and I
956
00:51:24,620 --> 00:51:26,620
know that everybody else is
planning to default, I'm never
957
00:51:26,620 --> 00:51:27,820
going to do it.
958
00:51:27,820 --> 00:51:31,400
And if I ever get a loan out of
it, I'm going to default as
959
00:51:31,400 --> 00:51:32,815
soon as I can because I
know everybody else
960
00:51:32,815 --> 00:51:34,040
is planning to default.
961
00:51:34,040 --> 00:51:39,540
So in these kinds of
institutions, default is
962
00:51:39,540 --> 00:51:43,010
entirely sort of
self-fulfilling.
963
00:51:43,010 --> 00:51:45,620
So if I expect default,
I'll have default.
964
00:51:45,620 --> 00:51:48,850
If I expect people to behave
well, we'll probably all
965
00:51:48,850 --> 00:51:49,910
behave well.
966
00:51:49,910 --> 00:51:52,970
So probably the reason why
these villages are so
967
00:51:52,970 --> 00:51:57,340
different is because of this
expectation mechanism which is
968
00:51:57,340 --> 00:51:59,920
very important to understand.
969
00:51:59,920 --> 00:52:03,050
And it's true of lots of
financial institutions.
970
00:52:03,050 --> 00:52:08,260
They rely on our future
compliance to work.
971
00:52:08,260 --> 00:52:17,850
And that's why, for example,
even banks to some extent--
972
00:52:17,850 --> 00:52:20,060
if I decide that I'm going to
withdraw my money from the
973
00:52:20,060 --> 00:52:23,020
bank, everybody is going to
withdraw money from the bank
974
00:52:23,020 --> 00:52:26,540
tomorrow, what should
I do today?
975
00:52:26,540 --> 00:52:28,040
AUDIENCE: [INAUDIBLE].
976
00:52:28,040 --> 00:52:29,030
PROFESSOR: I should
withdraw today.
977
00:52:29,030 --> 00:52:30,360
That's a bank run.
978
00:52:30,360 --> 00:52:32,370
So a lot of financial
institutions have
979
00:52:32,370 --> 00:52:33,570
exactly this feature.
980
00:52:33,570 --> 00:52:36,500
And that's why it's not so
surprising to see that some
981
00:52:36,500 --> 00:52:39,650
villages have very good
institutions, rich set of
982
00:52:39,650 --> 00:52:41,400
institutions, others don't.
983
00:52:41,400 --> 00:52:43,290
The fact that some villages
have default,
984
00:52:43,290 --> 00:52:45,080
it's the same reasoning.
985
00:52:45,080 --> 00:52:47,950
Once people start defaulting,
everybody's going to start
986
00:52:47,950 --> 00:52:48,360
defaulting.
987
00:52:48,360 --> 00:52:49,342
Yeah.
988
00:52:49,342 --> 00:52:52,779
AUDIENCE: Could it be possible
that in one village a default
989
00:52:52,779 --> 00:52:54,743
is costlier than in
another village?
990
00:52:54,743 --> 00:52:57,689
Maybe, like, socially you'll
be ostracized or something
991
00:52:57,689 --> 00:53:01,617
like that, and that will help
support the program where
992
00:53:01,617 --> 00:53:04,080
everyone pays into the fund?
993
00:53:04,080 --> 00:53:04,680
PROFESSOR: Sure.
994
00:53:04,680 --> 00:53:08,270
So it could very well be that
another thing that this tells
995
00:53:08,270 --> 00:53:10,580
us is that, for example,
a leader matters.
996
00:53:10,580 --> 00:53:14,850
So if the leader is someone who
can enforce punishments in
997
00:53:14,850 --> 00:53:17,020
the village so if I default--
998
00:53:17,020 --> 00:53:19,900
suppose I'm supposed to pay
back, and I know I can pay
999
00:53:19,900 --> 00:53:22,950
back but, you know, I just
refuse to do it.
1000
00:53:22,950 --> 00:53:28,870
If the leader can basically have
me ostracized then, in
1001
00:53:28,870 --> 00:53:30,780
some sense, I'm not
going to do it.
1002
00:53:30,780 --> 00:53:33,130
And then given that I'm not
going to do it, everybody else
1003
00:53:33,130 --> 00:53:34,620
is willing to pay
into the fund.
1004
00:53:34,620 --> 00:53:38,150
So it's going to be huge
leverage from effective
1005
00:53:38,150 --> 00:53:38,690
leadership.
1006
00:53:38,690 --> 00:53:41,370
That's the other actually
conclusion of this paper is
1007
00:53:41,370 --> 00:53:45,760
that there's a good leader in
the first village, and he was
1008
00:53:45,760 --> 00:53:48,670
very important in setting
up these institutions.
1009
00:53:48,670 --> 00:53:51,597
He made them work.
1010
00:53:51,597 --> 00:53:52,571
Yeah.
1011
00:53:52,571 --> 00:53:54,032
AUDIENCE: I was actually
going to ask that.
1012
00:53:54,032 --> 00:53:58,049
It seems that you have to
someone who's a good leader in
1013
00:53:58,049 --> 00:53:59,890
order to make these
things work.
1014
00:53:59,890 --> 00:54:04,773
But what was that guy or girl
doing to keep people confident
1015
00:54:04,773 --> 00:54:06,023
of the performance?
1016
00:54:06,023 --> 00:54:08,220
1017
00:54:08,220 --> 00:54:09,960
PROFESSOR: I can't tell you.
1018
00:54:09,960 --> 00:54:14,060
It said that the leader was
very energetic, et cetera.
1019
00:54:14,060 --> 00:54:16,300
There's a description of the
leader, but it doesn't tell me
1020
00:54:16,300 --> 00:54:19,880
what he was doing so much.
1021
00:54:19,880 --> 00:54:23,930
OK, so we already talked
about moral hazard--
1022
00:54:23,930 --> 00:54:26,960
other limits of insurance.
1023
00:54:26,960 --> 00:54:29,830
But I wanted to emphasize that
because I wanted to emphasize
1024
00:54:29,830 --> 00:54:31,790
that this is not just a
limit of insurance.
1025
00:54:31,790 --> 00:54:35,000
It's a limit of any institution
that is not
1026
00:54:35,000 --> 00:54:36,890
enforced by legal punishments.
1027
00:54:36,890 --> 00:54:39,880
Anything that's not enforced
by legal punishments is
1028
00:54:39,880 --> 00:54:43,440
fragile always.
1029
00:54:43,440 --> 00:54:44,860
It will work if it works.
1030
00:54:44,860 --> 00:54:46,490
It doesn't work, it
doesn't work.
1031
00:54:46,490 --> 00:54:50,200
That's sort of the main
point of that example.
1032
00:54:50,200 --> 00:54:53,370
If we all stop paying money
into the fund then
1033
00:54:53,370 --> 00:54:54,570
the fund will die.
1034
00:54:54,570 --> 00:54:56,600
So I might as well take
my money and run.
1035
00:54:56,600 --> 00:55:00,030
1036
00:55:00,030 --> 00:55:03,550
That's true of not just
insurance but of any other
1037
00:55:03,550 --> 00:55:05,210
kind of institution.
1038
00:55:05,210 --> 00:55:08,810
Now, moral hazard, we've
talked about.
1039
00:55:08,810 --> 00:55:12,320
I'm going to skip
moral hazard.
1040
00:55:12,320 --> 00:55:16,800
Here's another problem with
informal insurance.
1041
00:55:16,800 --> 00:55:18,630
This is all what we've been
talking about a bit.
1042
00:55:18,630 --> 00:55:25,690
1043
00:55:25,690 --> 00:55:30,660
So we've been sort of talking
about implicitly default.
1044
00:55:30,660 --> 00:55:32,910
But we've also been talking
about one thing that an
1045
00:55:32,910 --> 00:55:39,240
insurance arrangement demands is
that when it's your time to
1046
00:55:39,240 --> 00:55:41,580
pay, you pay.
1047
00:55:41,580 --> 00:55:43,270
Sometimes you get money
from the fund.
1048
00:55:43,270 --> 00:55:45,360
Sometimes you pay
into the fund.
1049
00:55:45,360 --> 00:55:47,370
You have to be willing to
pay money into the fund.
1050
00:55:47,370 --> 00:55:49,050
That's what keeps it going.
1051
00:55:49,050 --> 00:55:51,920
1052
00:55:51,920 --> 00:55:55,790
Why do you want to keep putting
money in the fund?
1053
00:55:55,790 --> 00:55:59,590
We said this already,
but just to repeat.
1054
00:55:59,590 --> 00:56:01,830
Today I am rich.
1055
00:56:01,830 --> 00:56:04,260
I want to put money into the
fund so that somebody else can
1056
00:56:04,260 --> 00:56:05,290
take it out.
1057
00:56:05,290 --> 00:56:06,540
Why would I want to do it?
1058
00:56:06,540 --> 00:56:11,660
1059
00:56:11,660 --> 00:56:14,968
Why does anyone want to
put money into a fund?
1060
00:56:14,968 --> 00:56:15,780
AUDIENCE: [INAUDIBLE].
1061
00:56:15,780 --> 00:56:16,752
PROFESSOR: Sorry?
1062
00:56:16,752 --> 00:56:18,120
AUDIENCE: To get more
money back.
1063
00:56:18,120 --> 00:56:18,560
PROFESSOR: Yeah.
1064
00:56:18,560 --> 00:56:23,450
Eventually you pay me some
return on the fund.
1065
00:56:23,450 --> 00:56:26,890
But if it has to have an
insurance component then it
1066
00:56:26,890 --> 00:56:32,000
has to be that the return I get
on it is lower than the
1067
00:56:32,000 --> 00:56:36,830
market return because otherwise
they could have
1068
00:56:36,830 --> 00:56:38,020
borrowed from the market.
1069
00:56:38,020 --> 00:56:40,770
It doesn't provide
any insurance.
1070
00:56:40,770 --> 00:56:45,110
So it can't be just because I
want to get the money back.
1071
00:56:45,110 --> 00:56:50,080
It must be because I expect that
I will be able to borrow
1072
00:56:50,080 --> 00:56:53,180
from the fund in the
future as well.
1073
00:56:53,180 --> 00:56:56,050
So I will be willing to put
money into a fund which pays
1074
00:56:56,050 --> 00:56:59,500
lower than market rate, which
is what insurance is.
1075
00:56:59,500 --> 00:57:04,080
Insurance is that I'm willing
to lend to someone at lower
1076
00:57:04,080 --> 00:57:09,590
than market rates so that when
he's in bad shape, he doesn't
1077
00:57:09,590 --> 00:57:10,500
suffer too much.
1078
00:57:10,500 --> 00:57:11,650
That's what's insurance.
1079
00:57:11,650 --> 00:57:14,268
AUDIENCE: It's probably also
probably the reason why
1080
00:57:14,268 --> 00:57:15,696
wealthier people would be
less likely to give
1081
00:57:15,696 --> 00:57:16,410
into a fund, right?
1082
00:57:16,410 --> 00:57:19,320
Because they're already exposed
to less risk than they
1083
00:57:19,320 --> 00:57:19,390
have already.
1084
00:57:19,390 --> 00:57:21,359
PROFESSOR: Exactly.
1085
00:57:21,359 --> 00:57:23,454
AUDIENCE: I thought you
said that why would a
1086
00:57:23,454 --> 00:57:23,854
rich person do it.
1087
00:57:23,854 --> 00:57:25,723
Because I was like, I don't
know why a rich
1088
00:57:25,723 --> 00:57:26,710
person would do it.
1089
00:57:26,710 --> 00:57:28,870
PROFESSOR: Well, one reason they
may want to do it is that
1090
00:57:28,870 --> 00:57:31,420
they feel the same need as--
1091
00:57:31,420 --> 00:57:34,940
so what's an insurance fund?
1092
00:57:34,940 --> 00:57:37,370
An insurance fund is a fund
where I put in money so that
1093
00:57:37,370 --> 00:57:40,820
other people can be helped in
return for the fact that they
1094
00:57:40,820 --> 00:57:43,470
will put in money and
I will be helped.
1095
00:57:43,470 --> 00:57:47,720
Why would I put in money now?
1096
00:57:47,720 --> 00:57:49,540
Because I expect to be
helped in the future.
1097
00:57:49,540 --> 00:57:51,350
So what are the kinds of
people who don't want
1098
00:57:51,350 --> 00:57:53,040
to join that fund?
1099
00:57:53,040 --> 00:57:57,580
You already gave one answer,
which is people who are rich.
1100
00:57:57,580 --> 00:57:59,360
They don't expect
to get helped.
1101
00:57:59,360 --> 00:58:01,390
So that's why you're going to
see that if there's a lot of
1102
00:58:01,390 --> 00:58:05,620
inequality in the village,
you're unlikely to see a fund
1103
00:58:05,620 --> 00:58:08,430
because the rich don't really
think that they can be helped
1104
00:58:08,430 --> 00:58:09,650
by the poor.
1105
00:58:09,650 --> 00:58:11,730
If they ever need money, they're
going to need, you
1106
00:58:11,730 --> 00:58:13,990
know, $100,000.
1107
00:58:13,990 --> 00:58:15,170
The poor won't have it.
1108
00:58:15,170 --> 00:58:17,460
And, otherwise, they
won't need money.
1109
00:58:17,460 --> 00:58:18,718
Yeah.
1110
00:58:18,718 --> 00:58:20,200
AUDIENCE: I think the chapter
also mentioned
1111
00:58:20,200 --> 00:58:23,164
timing as one factor.
1112
00:58:23,164 --> 00:58:28,104
I mean, if people always
postpone, they value future
1113
00:58:28,104 --> 00:58:30,090
outcomes less than
[INAUDIBLE].
1114
00:58:30,090 --> 00:58:30,520
PROFESSOR: Right.
1115
00:58:30,520 --> 00:58:34,010
So you need to be forward
looking to be willing to
1116
00:58:34,010 --> 00:58:36,070
behave well and be
forward looking.
1117
00:58:36,070 --> 00:58:41,530
If I always think that, well,
I'll just not pay now and
1118
00:58:41,530 --> 00:58:43,680
whatever happens in
the future, that's
1119
00:58:43,680 --> 00:58:44,370
not going to work.
1120
00:58:44,370 --> 00:58:46,350
You need to be forward
looking.
1121
00:58:46,350 --> 00:58:50,830
And what's the point
around migration?
1122
00:58:50,830 --> 00:58:52,130
Why is migration important?
1123
00:58:52,130 --> 00:59:08,722
1124
00:59:08,722 --> 00:59:11,466
AUDIENCE: Could you say that as
you have to expect to be in
1125
00:59:11,466 --> 00:59:12,121
that area to benefit?
1126
00:59:12,121 --> 00:59:12,870
PROFESSOR: In the
villiage, yeah.
1127
00:59:12,870 --> 00:59:15,500
You need to be in the village
to benefit from the fund.
1128
00:59:15,500 --> 00:59:20,760
If I expect to go away, I don't
know whether I'm going
1129
00:59:20,760 --> 00:59:23,010
to be here to benefit
from this fund.
1130
00:59:23,010 --> 00:59:25,600
So if there's a lot of mobility
in a place then
1131
00:59:25,600 --> 00:59:26,760
everything falls apart.
1132
00:59:26,760 --> 00:59:37,930
So villages that are closer to
the road, to a big city, find
1133
00:59:37,930 --> 00:59:40,500
it harder to insure
each other.
1134
00:59:40,500 --> 00:59:41,110
Why?
1135
00:59:41,110 --> 00:59:45,300
Because everybody there has
a link to the city.
1136
00:59:45,300 --> 00:59:48,870
So they don't know whether
they're going to help from the
1137
00:59:48,870 --> 00:59:51,010
village or they're going
to go to the city
1138
00:59:51,010 --> 00:59:52,910
and get a job there.
1139
00:59:52,910 --> 00:59:56,850
And so given that I am not
committed to being in the
1140
00:59:56,850 --> 00:59:59,510
village, it's very hard
to give me insurance.
1141
00:59:59,510 --> 01:00:01,480
So all of these things.
1142
01:00:01,480 --> 01:00:06,570
You need low mobility, low
inequality, and forward
1143
01:00:06,570 --> 01:00:07,795
looking people.
1144
01:00:07,795 --> 01:00:08,785
Yeah.
1145
01:00:08,785 --> 01:00:11,095
AUDIENCE: Also we should say
there are people who have
1146
01:00:11,095 --> 01:00:14,871
access to ways to save their
money Right then--
1147
01:00:14,871 --> 01:00:15,833
PROFESSOR: That's an
excellent point.
1148
01:00:15,833 --> 01:00:19,690
What would a bank account do?
1149
01:00:19,690 --> 01:00:21,260
A bank account would undermine
insurance.
1150
01:00:21,260 --> 01:00:21,850
Why?
1151
01:00:21,850 --> 01:00:25,640
Because in a bank account
I now can get high
1152
01:00:25,640 --> 01:00:28,530
return on my savings.
1153
01:00:28,530 --> 01:00:33,720
So when I have money, it's more
tempting for me to put it
1154
01:00:33,720 --> 01:00:36,050
in the bank account rather
than put it in this fund,
1155
01:00:36,050 --> 01:00:38,280
which is going to pay me a
lower return because it's
1156
01:00:38,280 --> 01:00:39,970
trying to help out
other people.
1157
01:00:39,970 --> 01:00:44,350
So any outside options that
you provide-- so financial
1158
01:00:44,350 --> 01:00:47,710
development might undermine
local institutions.
1159
01:00:47,710 --> 01:00:50,540
So you might actually see worse
institutions where the
1160
01:00:50,540 --> 01:00:54,096
financial system is
better formally.
1161
01:00:54,096 --> 01:00:55,088
Yeah.
1162
01:00:55,088 --> 01:00:59,056
AUDIENCE: I misunderstood
the whole fund.
1163
01:00:59,056 --> 01:01:02,540
You said that the market rate
was higher than the fund rate.
1164
01:01:02,540 --> 01:01:02,872
PROFESSOR: Yes.
1165
01:01:02,872 --> 01:01:03,530
Yes.
1166
01:01:03,530 --> 01:01:07,940
AUDIENCE: So even if there was
a bank and you experienced
1167
01:01:07,940 --> 01:01:10,432
some hardship, you would
be more inclined to
1168
01:01:10,432 --> 01:01:10,780
borrow money from--
1169
01:01:10,780 --> 01:01:11,350
PROFESSOR: Oh, absolutely.
1170
01:01:11,350 --> 01:01:12,812
It's the other way around.
1171
01:01:12,812 --> 01:01:15,170
The question is who do you
borrow money from?
1172
01:01:15,170 --> 01:01:18,390
If the bank does it, it makes
it too easy for me.
1173
01:01:18,390 --> 01:01:20,800
Today, I have money and
you need money.
1174
01:01:20,800 --> 01:01:22,900
I'm going to put my
money in the bank.
1175
01:01:22,900 --> 01:01:24,520
That's why you can't get
money from the fund.
1176
01:01:24,520 --> 01:01:27,180
1177
01:01:27,180 --> 01:01:29,020
The fund is a two way
street, right?
1178
01:01:29,020 --> 01:01:29,950
I need to put in money.
1179
01:01:29,950 --> 01:01:31,200
You need to take out money.
1180
01:01:31,200 --> 01:01:34,630
1181
01:01:34,630 --> 01:01:37,900
As my options of putting money
elsewhere get better, it's
1182
01:01:37,900 --> 01:01:39,580
going to be harder and harder
to force me to put
1183
01:01:39,580 --> 01:01:41,980
money into the fund.
1184
01:01:41,980 --> 01:01:44,080
AUDIENCE: Even if the rates at
the other places are higher
1185
01:01:44,080 --> 01:01:45,330
than the rates at the fund.
1186
01:01:45,330 --> 01:01:47,780
1187
01:01:47,780 --> 01:01:49,640
PROFESSOR: Especially, right?
1188
01:01:49,640 --> 01:01:51,130
Let me be clear.
1189
01:01:51,130 --> 01:01:52,290
What are we saying?
1190
01:01:52,290 --> 01:01:53,920
There's a fund.
1191
01:01:53,920 --> 01:01:54,520
What's a fund?
1192
01:01:54,520 --> 01:01:59,260
The fund is that I put
money into it.
1193
01:01:59,260 --> 01:02:00,940
I get lower than market rates.
1194
01:02:00,940 --> 01:02:01,240
Why?
1195
01:02:01,240 --> 01:02:03,400
Because I want to give that
money to someone else who
1196
01:02:03,400 --> 01:02:07,340
needs it desperately,
providing insurance.
1197
01:02:07,340 --> 01:02:10,430
There's also a bank, which
pays the market rate.
1198
01:02:10,430 --> 01:02:14,550
Now, as the market rate gets
higher, it's harder and harder
1199
01:02:14,550 --> 01:02:18,970
for the guy who has money today
to not feel tempted to
1200
01:02:18,970 --> 01:02:22,350
put his money into the bank.
1201
01:02:22,350 --> 01:02:24,064
Yeah, you had a comment.
1202
01:02:24,064 --> 01:02:27,508
AUDIENCE: But, like, there's
a threshold, right?
1203
01:02:27,508 --> 01:02:29,609
You have to have a certain
amount of money before you can
1204
01:02:29,609 --> 01:02:30,240
open a bank account.
1205
01:02:30,240 --> 01:02:30,510
PROFESSOR: Sure.
1206
01:02:30,510 --> 01:02:33,385
So maybe the bank is not
actually available to you.
1207
01:02:33,385 --> 01:02:35,460
But if the bank is available to
you, that might actually be
1208
01:02:35,460 --> 01:02:36,710
bad for insurance.
1209
01:02:36,710 --> 01:02:40,930
1210
01:02:40,930 --> 01:02:43,630
That's sort of maybe surprising
that a bank shows
1211
01:02:43,630 --> 01:02:46,280
up and that actually undermines
people's ability to
1212
01:02:46,280 --> 01:02:51,070
insure each other because it's
too easy to now park your
1213
01:02:51,070 --> 01:02:53,850
money elsewhere.
1214
01:02:53,850 --> 01:02:57,250
Other reasons why informal
insurance doesn't work very
1215
01:02:57,250 --> 01:03:00,350
well, we've also talked
about the
1216
01:03:00,350 --> 01:03:04,750
coordination quite a lot already.
1217
01:03:04,750 --> 01:03:10,420
1218
01:03:10,420 --> 01:03:13,370
If I expect to default
on the fund then you
1219
01:03:13,370 --> 01:03:14,550
will default too.
1220
01:03:14,550 --> 01:03:16,800
That's coordination.
1221
01:03:16,800 --> 01:03:29,470
Also you would expect that these
funds only work because
1222
01:03:29,470 --> 01:03:38,050
I know when you really need
money and when you don't
1223
01:03:38,050 --> 01:03:41,130
because otherwise you could
always say I need money.
1224
01:03:41,130 --> 01:03:45,460
So you're not letting people
who are very isolated--
1225
01:03:45,460 --> 01:03:49,020
so people who are not in the
village network don't get into
1226
01:03:49,020 --> 01:03:49,930
these funds.
1227
01:03:49,930 --> 01:03:54,860
They tend to be of people who
are relatively well connected
1228
01:03:54,860 --> 01:03:56,100
to the village community.
1229
01:03:56,100 --> 01:03:56,410
Why?
1230
01:03:56,410 --> 01:04:00,240
Because I need to know whether
you're lying or not.
1231
01:04:00,240 --> 01:04:03,850
And if you live next to me I
know that, yes, your cow died
1232
01:04:03,850 --> 01:04:04,760
or whatever.
1233
01:04:04,760 --> 01:04:11,330
Your pig was eaten up by a tiger
or something, whatever
1234
01:04:11,330 --> 01:04:12,390
happens to pigs.
1235
01:04:12,390 --> 01:04:18,790
But if you live far away, how
do I know whether you are in
1236
01:04:18,790 --> 01:04:19,890
trouble or not?
1237
01:04:19,890 --> 01:04:26,400
So it tends to be that this is
concentrated among people who
1238
01:04:26,400 --> 01:04:28,220
know each other.
1239
01:04:28,220 --> 01:04:30,540
The scope of the insurance
is limited.
1240
01:04:30,540 --> 01:04:36,700
1241
01:04:36,700 --> 01:04:42,280
And, finally, in some sense,
this is a very bad mechanism
1242
01:04:42,280 --> 01:04:44,650
for dealing with shocks which
affect everybody in the
1243
01:04:44,650 --> 01:04:47,600
village, obviously.
1244
01:04:47,600 --> 01:04:50,490
If there is one blight in the
village which affects
1245
01:04:50,490 --> 01:04:53,180
everybody, this is not going to
help anybody because nobody
1246
01:04:53,180 --> 01:04:55,660
can help each other.
1247
01:04:55,660 --> 01:05:00,690
So that takes us back to where
we were at the end of the last
1248
01:05:00,690 --> 01:05:03,590
lecture, which is saying on
the other hand, formal
1249
01:05:03,590 --> 01:05:06,420
insurance markets are
hard to develop.
1250
01:05:06,420 --> 01:05:08,230
That's where we ended
last time.
1251
01:05:08,230 --> 01:05:10,530
We said formal insurance markets
are hard to develop.
1252
01:05:10,530 --> 01:05:11,110
Why?
1253
01:05:11,110 --> 01:05:13,500
Because people are suspicious
of these products.
1254
01:05:13,500 --> 01:05:14,700
They don't understand them.
1255
01:05:14,700 --> 01:05:16,160
They're too complicated.
1256
01:05:16,160 --> 01:05:19,480
They have all these exclusions,
which you don't
1257
01:05:19,480 --> 01:05:20,270
understand.
1258
01:05:20,270 --> 01:05:21,170
So you don't like it.
1259
01:05:21,170 --> 01:05:23,680
I was telling the story of all
of these women who got really
1260
01:05:23,680 --> 01:05:27,670
upset because one of their
friend's husband died.
1261
01:05:27,670 --> 01:05:30,260
But the medical health insurance
didn't pay for it.
1262
01:05:30,260 --> 01:05:33,095
Health insurance was actually
right in not paying for it in
1263
01:05:33,095 --> 01:05:36,185
formal terms because their
contract said we'll only pay
1264
01:05:36,185 --> 01:05:37,740
for people who go
to the hospital.
1265
01:05:37,740 --> 01:05:39,080
He died at home.
1266
01:05:39,080 --> 01:05:43,890
But they thought that, well,
something bad happened.
1267
01:05:43,890 --> 01:05:45,450
Why aren't you paying for it?
1268
01:05:45,450 --> 01:05:49,820
So they basically
got very upset.
1269
01:05:49,820 --> 01:05:52,150
So insurance is confusing.
1270
01:05:52,150 --> 01:05:55,610
Formal insurance has rules,
which if you [INAUDIBLE]
1271
01:05:55,610 --> 01:05:56,990
you don't understand.
1272
01:05:56,990 --> 01:06:02,200
It tends to be quite limited
in other ways.
1273
01:06:02,200 --> 01:06:06,530
I know a lot about
my neighbors.
1274
01:06:06,530 --> 01:06:13,290
I know if his cow was eaten up
by a tiger, for example.
1275
01:06:13,290 --> 01:06:16,880
Insurance company doesn't know
anything about my neighbor, so
1276
01:06:16,880 --> 01:06:19,640
it can't insure things
like that.
1277
01:06:19,640 --> 01:06:20,950
But there's a very nice story.
1278
01:06:20,950 --> 01:06:25,220
1279
01:06:25,220 --> 01:06:27,120
So cow insurance--
1280
01:06:27,120 --> 01:06:29,360
I bring up the example because
it's a good example.
1281
01:06:29,360 --> 01:06:32,190
1282
01:06:32,190 --> 01:06:35,020
Insuring cows is a big issue
in every developing country
1283
01:06:35,020 --> 01:06:36,990
because cows are
a major asset.
1284
01:06:36,990 --> 01:06:40,080
In some countries, like in
Botswana, it's the single
1285
01:06:40,080 --> 01:06:42,910
biggest asset other than
diamonds, it turns out.
1286
01:06:42,910 --> 01:06:45,420
So there only two major
assets in Botswana.
1287
01:06:45,420 --> 01:06:48,150
They are cows and diamonds.
1288
01:06:48,150 --> 01:06:49,730
But most people have cows.
1289
01:06:49,730 --> 01:06:51,880
Very few people have diamonds.
1290
01:06:51,880 --> 01:06:58,290
So insurance companies have been
trying for a long time to
1291
01:06:58,290 --> 01:06:59,340
insure cows.
1292
01:06:59,340 --> 01:07:04,370
The problem is that you insure
cows by saying if the cow
1293
01:07:04,370 --> 01:07:06,380
dies, I'll pay you money.
1294
01:07:06,380 --> 01:07:09,190
But it's convenient for
cows to die because
1295
01:07:09,190 --> 01:07:10,970
they turn into steaks.
1296
01:07:10,970 --> 01:07:14,630
And steaks, many people
like them.
1297
01:07:14,630 --> 01:07:19,910
So they create a huge moral
hazard problem.
1298
01:07:19,910 --> 01:07:23,170
So this company, [INAUDIBLE],
had a very clever idea.
1299
01:07:23,170 --> 01:07:28,270
They said that if you claim that
your cow has died, you're
1300
01:07:28,270 --> 01:07:29,870
to bring me the ear
of the cow.
1301
01:07:29,870 --> 01:07:33,510
1302
01:07:33,510 --> 01:07:37,210
Dead cow, you're to cut his
ear off and show it to me.
1303
01:07:37,210 --> 01:07:39,210
I don't know.
1304
01:07:39,210 --> 01:07:40,460
What happened?
1305
01:07:40,460 --> 01:07:42,770
1306
01:07:42,770 --> 01:07:44,230
AUDIENCE: A lot of
earless cows?
1307
01:07:44,230 --> 01:07:48,166
1308
01:07:48,166 --> 01:07:51,088
AUDIENCE: So everytime my cow
died I would start cutting off
1309
01:07:51,088 --> 01:07:53,320
ears and creating, like, a
black market [INAUDIBLE].
1310
01:07:53,320 --> 01:07:54,420
PROFESSOR: Right.
1311
01:07:54,420 --> 01:07:56,130
So imagine my cow dies.
1312
01:07:56,130 --> 01:07:56,630
I'm not insured.
1313
01:07:56,630 --> 01:07:57,820
What do I do?
1314
01:07:57,820 --> 01:08:00,550
I cut off his ear and sell it
to somebody who's insured.
1315
01:08:00,550 --> 01:08:04,210
It created a robust market
for cow ears.
1316
01:08:04,210 --> 01:08:06,360
Everybody was buying cow
ears to go to the
1317
01:08:06,360 --> 01:08:08,070
bank and collect insurance.
1318
01:08:08,070 --> 01:08:14,180
So that's your primary problem
with sort of formal insurance.
1319
01:08:14,180 --> 01:08:16,620
They don't know where
the cow died.
1320
01:08:16,620 --> 01:08:18,819
They have to figure out a
way to track that down.
1321
01:08:18,819 --> 01:08:23,760
That's not easy to do because
of this ear problem.
1322
01:08:23,760 --> 01:08:26,840
So basically we're between
a rock and a hard place.
1323
01:08:26,840 --> 01:08:28,540
People don't understand
insurance.
1324
01:08:28,540 --> 01:08:35,330
Insurance is incomplete, at
best, because you can't really
1325
01:08:35,330 --> 01:08:36,859
insure cows because
I don't know when
1326
01:08:36,859 --> 01:08:38,420
your cow died or not.
1327
01:08:38,420 --> 01:08:40,979
On the other hand, if we look
at insurance that comes from
1328
01:08:40,979 --> 01:08:44,069
the community, the people who
have the information, that is
1329
01:08:44,069 --> 01:08:46,229
too limited for these other
reasons we've discussed.
1330
01:08:46,229 --> 01:08:48,779
So we were kind of between
a rock and a hard place.
1331
01:08:48,779 --> 01:08:54,560
So I think the message of this
particular area is that this
1332
01:08:54,560 --> 01:09:00,470
is a classic area where a
government providing some kind
1333
01:09:00,470 --> 01:09:06,359
of insurance that's not expected
to break even is much
1334
01:09:06,359 --> 01:09:07,609
more efficient.
1335
01:09:07,609 --> 01:09:11,700
1336
01:09:11,700 --> 01:09:15,149
So rather than thinking
of insurance
1337
01:09:15,149 --> 01:09:18,340
which is market supplied--
1338
01:09:18,340 --> 01:09:22,104
for example, a government scheme
which says you can come
1339
01:09:22,104 --> 01:09:27,090
to work whenever you need to
work and we'll pay you a
1340
01:09:27,090 --> 01:09:34,290
minimum wage is very
effective because
1341
01:09:34,290 --> 01:09:35,279
the wage is low enough.
1342
01:09:35,279 --> 01:09:38,090
You're not ever going
to take that job if
1343
01:09:38,090 --> 01:09:44,359
you have a real job.
1344
01:09:44,359 --> 01:09:46,689
You only take it when
you're desperate.
1345
01:09:46,689 --> 01:09:50,010
So that's a very efficient
way to provide insurance.
1346
01:09:50,010 --> 01:09:51,810
Now, the problem is
that that's not
1347
01:09:51,810 --> 01:09:53,750
going to fund itself.
1348
01:09:53,750 --> 01:09:58,950
It's a one way payment
from the government.
1349
01:09:58,950 --> 01:10:02,490
But on the other hand, it makes
sure that anybody who is
1350
01:10:02,490 --> 01:10:05,520
really desperate can
find a job and
1351
01:10:05,520 --> 01:10:07,860
therefore it secures them.
1352
01:10:07,860 --> 01:10:09,370
So in some terms this
is a classic area--
1353
01:10:09,370 --> 01:10:11,930
or if you think of insurance
where people don't understand
1354
01:10:11,930 --> 01:10:16,000
the product, well, they don't
want to buy it because they
1355
01:10:16,000 --> 01:10:16,820
don't understand the product.
1356
01:10:16,820 --> 01:10:18,680
But if you provide it free,
they'll take it.
1357
01:10:18,680 --> 01:10:23,210
So if the government were to
actually subsidize insurance,
1358
01:10:23,210 --> 01:10:25,960
that might be a very good way
to help poor people because
1359
01:10:25,960 --> 01:10:28,730
it's something that they
don't understand
1360
01:10:28,730 --> 01:10:29,930
that's good for them.
1361
01:10:29,930 --> 01:10:34,090
The demand is too low because
they don't know how to
1362
01:10:34,090 --> 01:10:34,330
interpret it.
1363
01:10:34,330 --> 01:10:37,970
On the other hand, they will
get the benefits from it.
1364
01:10:37,970 --> 01:10:42,430
I think insurance is a very,
very natural place for public
1365
01:10:42,430 --> 01:10:43,680
intervention.
1366
01:10:43,680 --> 01:10:46,680
And I think that's sort of
what makes it really
1367
01:10:46,680 --> 01:10:50,860
interesting is how to design
good insurance products for
1368
01:10:50,860 --> 01:10:55,720
poor people which possibly
combine some advantage of the
1369
01:10:55,720 --> 01:11:00,540
market and some advantages
of public funding.
1370
01:11:00,540 --> 01:11:03,600
So, for example, instead of
the government providing
1371
01:11:03,600 --> 01:11:07,340
health care, maybe everybody
should have health insurance
1372
01:11:07,340 --> 01:11:11,220
with some appropriately
designed coverage.
1373
01:11:11,220 --> 01:11:13,450
And maybe that should be
provided free to people.
1374
01:11:13,450 --> 01:11:15,710
If they don't understand the
value of it, that's fine.
1375
01:11:15,710 --> 01:11:18,660
In the end, sick people are a
burden of the government.
1376
01:11:18,660 --> 01:11:23,930
So they might as well
provide it ex-ante.
1377
01:11:23,930 --> 01:11:26,610
Providing a job to everybody--
1378
01:11:26,610 --> 01:11:29,670
work fair is the word people
use in the US--
1379
01:11:29,670 --> 01:11:34,240
to people who want a job is a
way to make sure that people,
1380
01:11:34,240 --> 01:11:37,370
when they're desperate, there's
some way of generating
1381
01:11:37,370 --> 01:11:41,050
income and that the wage at that
income doesn't go down
1382
01:11:41,050 --> 01:11:43,200
because everybody's
demanding a job.
1383
01:11:43,200 --> 01:11:45,470
So in some sense it's a
way to secure people.
1384
01:11:45,470 --> 01:11:49,830
And it's a way to do it
efficiently, to make sure that
1385
01:11:49,830 --> 01:11:52,210
the right people go to it.
1386
01:11:52,210 --> 01:11:53,330
You don't want to
give them money.
1387
01:11:53,330 --> 01:11:56,080
You want to give them a job
because a job has the
1388
01:11:56,080 --> 01:11:58,070
advantage that you
get targeted.
1389
01:11:58,070 --> 01:12:00,130
So in some sense it's a
good domain to think
1390
01:12:00,130 --> 01:12:02,190
about public policy.
1391
01:12:02,190 --> 01:12:03,120
I'll stop here.
1392
01:12:03,120 --> 01:12:04,590
We might talk a little bit
more about it later.
1393
01:12:04,590 --> 01:12:10,943